The Futility of Rate Predictions: Why Forecasting Interest Movements is a Gamble

The interest rate markets have a way of humbling almost all the ‘experts’ and the very first thing you learn in Secondary Marketing is that you shouldn’t take a view on where rates are headed because half the time, you’re wrong anyway. In Q4 last year the arm-chair prognosticators were predicting that we’d see rates come down by the end of 2023, however, that simply does not appear to be the case as many LOs are originating in the 7% range currently.

The Federal Reserve, in its attempts to control inflation and cool a very strong economy, have raised Fed Funds three times just in 2023 alone, with another 25-bps increase predicted for July’s meeting, and a window left open for another increase before the end of the year. I continue to read, however, inside the world of mortgage banking, opinions expressed that rates will not only come down, but when to expect this to happen. Based upon what data, I ask? Are their views speculative, biased, or just hopeful?

I would challenge these prognosticators as to ‘why’ mortgage rates are positioned to fall. What leads them to predict that? I’m sure some opinions are based on fundamentals: Fed raises rates to control inflation, money is taken out of the economy, the economy cools, Fed cuts rates, and mortgages come down to some predicted level. A lot of the predictions I see are not rooted in actuality, but rather rooted in exuberance for mortgage banking.

Here’s some additional perspective. None of the macro data even hints at a reduction of short-term interest rates. Current inflation is a tad north of 4% with the Federal Reserve’s target set at 2% Economists have modeled that unemployment would need to reach as high as 7% in order for inflation to come down to 2%; however, June’s unemployment report had very little change from May’s with the current rate at 3.6% Remember, when an economy ‘slows’ jobs are not created, historically they’re lost.

Everything points to the Fed being hawkish in its monetary policy for the remainder of the year. Anyone predicting where interest rates will be in the future would need to start by predicting where the Federal Funds rate NEEDS to be in order to see inflation that’s appealing to the Fed, and then ultimately, HOW LONG rates needs to remain there; when is it warranted to reduce borrowing rates under recessionary fears? These are two almost impossible questions to answer since the number of variables that you need to get right, coupled with unpredictable world events, play such a strong role in forecasting interest rates.”

Like I said before, a year from now, rates will either be higher, lower or the same. So let’s discuss your products and services!