A Look Back
At the end of 2007, as we were falling into one of the worst economic periods in the history of the United States, economists were predicting that it would be 2011 – 2012 before we would start to see signs of growth in the economy again. Well, here we are almost at the end of the first quarter in 2011 and we are starting to see signs of growth again.
Over the last four years, the unemployment rate was as high as 10% while the under-employment rate (people who worked part time, less hours, or who took themselves out of the employment market altogether) was as high as 18.5%. As of Friday, March 4th, 2011, the unemployment rate is now at 8.9% which represents the best rate in over two years. Additionally, this is the third straight month of positive news in the employment sector.
On a very simplistic level, there are three major areas to look at to forecast inflation; cost of goods and services, consumer spending, and The Federal Reserve.
Cost of Goods
We are going to continue to see an increase in the cost of gasoline prices due the fear in the market over what is going on in the Middle East. Even though supply has not been affected, the perception is that it could be, and as a result the price of gasoline could reach $4 per gallon by the summer of 2011. As a result of climbing gas prices, there will be upward pressure on food costs and we have already seen a significant rise in the cost of many commodities. Beer, coffee, tires and breakfast cereals, to name a few, have already seen increases of 20% – 100%.
The American Consumer will continue to keep a tight hold on their wallets as there is still a major concern over job stability. The American consumer will need to see a longer period of job growth before they start to spend more freely.
The Federal Reserve
Ben Bernanke, the Chaiman of the Federal Reserve, has indicated that inflation will remain low through 2013. Mr. Bernanke clearly stated that the Fed will not pare back their QE2 stimulus package until there is a “sustained period of stronger job creation”. With the benchmark federal funds rate staying near zero, look for the prime rate to remain at 3.25% through 2011. The existing stimulus package in tandem with the Fed’s ongoing purchases of long-term Treasuries, I would be surprised to see the 10-year Treasury note climb above 3.8% in 2011.
A Look Ahead
So what does this mean for interest rates? We should see the interest rate environment for 30 year fixed money; vacillate between 4.875% and 5.375% in 2011. The one note of caution is the cost of oil; this could have a negative impact on long term rates if oil climbs to higher than expected price levels.
For anyone considering buying a home, 2011 is the time to buy, as the cost of money will be significantly higher in 2012. Why will this happen? Well, growth leads to inflation and inflation is the nemesis of the bond market so rates will climb as a result.