Buy a home right now.
Or if you own one already, refinance it. And if you have spare cash, buy some stocks.
And if there’s a bubble in prices, don’t worry. It’ll get fixed later.
Simply put, that’s the new message from the powerful Federal Reserve.
The central bank just revised the goals of its monetary policy. The laymen’s translation? If you didn’t think rates were going to be low for a long-time, you were not listening.
Cheap money is not a fad, people. Mortgage-rate cuts, for example, gave house hunters 25% more buying power in less than two years. That’s not ending soon.
So save the economy by borrowing at low-low-low rates and put your cash to work! Even if you have to pay record high prices for real estate or shares on Wall Street.
Now, rock-bottom interest rates seemingly forever may confuse some of you. I have answers to a few questions you might have.
Q. Who made the Fed king?
A. That “Hamilton” musical? It was THAT guy.
You see, the Fed has a tough job as the arbiter of interest rates, setting the proper “lubricant” for the economy. It’s a juggle of job creation vs. inflation.
That chore is tougher when political division has made meaningful economic management inconsistent at best.
So I applaud the Fed for stepping into the leadership vacuum. But this extended “free money” policy makes little sense.
Q. What changed?
A. The Fed claims it cannot find evidence that the cost of living is getting out of hand, based on its review of inflation rates.
The most noteworthy nugget from the research shows that the pre-pandemic hiring spree (remember those “good ol’ days”) didn’t create skyrocketing labor costs. You know, stingy bosses didn’t give out big raises.
“A robust job market can be sustained without causing an outbreak of inflation,” Fed Chairman Jerome Powell said in announcing the new policy Thursday.
In fact, the Fed fears overall pricing power may be on a long-term decline and warns the economic illness called “deflation” can be hard to cure. Obviously, the board members haven’t shopped much lately, especially for a home.
So not only is 0% here for a long time, the Fed says it will no longer raise the rates it controls at the first whiff of inflation it might see.
Q. So how will this help the unemployed?
A. Interest rates can only go so far in tweaking the economy. Cheap money is far more useful for society’s haves than its have-nots.
A simple example: Unemployed people don’t usually borrow at rates the Fed controls — if they get loans at all.
This is a huge bet by the Fed to lure corporations and the employed to borrow and spend. That added demand might put the jobless back at work.
The Fed policy, says economist Mark Schniepp of California Economist Forecast, “sends a message that investment dollars are going to be needed to get this economy and the labor market back sooner than all of us forecasters are saying. The labor markets are the highest priority right now.”
Q. So 0% motivates folks who can afford to borrow and invest. And that benefits the rest of us?
A. Here’s what Ali Wolf, a real estate analyst for Meyers LLC told me.
“What I’m afraid of with their actions is that they are not only going to create a wealth gap between people but also companies. The big companies are the ones that have excess access to capital markets. That doesn’t translate as well to the mom and pop shop in your local strip mall.”
Q. So I should buy a house and/or stocks?
A. The theory is that enough people buy houses or stocks (a new vehicle would be swell, too) … that spending could generate enough economic momentum to cure the current business doldrums.
Yes, soaring real estate or surging stock prices might juice the economy.
Of course, then … the Fed would see inflation!
Q. You mean, the Fed creates a bubble … only to burst it?
A. Let me have professor Jim Doti of Chapman University answer that.
“The unprecedented monetary stimulus we’ve already had will in the long run — maybe one to two years — lead to higher interest — including mortgage — rates. That, in turn, will likely burst the bubble.”
Q. C’mon, Jon. The Fed’s smart people!
A. In June 2005, as a housing bubble brewed, then-Fed Chairman Alan Greenspan said this to Congress …
”There can be little doubt that exceptionally low-interest rates on 10-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices. Although a ‘bubble’ in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.”
History can repeat itself.
