Restive Fed Hawks Could Mean Higher Mortgage Rates By Summer

Several influential members of the Federal Reserve board sounded the alarm late last week on the central bank’s stimulus program. Dennis Lockhart, Richard Fisher and Charles Plosser, who all wield votes this year on the twelve-member Federal Open Market Committe(FOMC), delivered a clear message in separate interviews and speeches on Thursday and Friday: continued Fed stimulus is a bad idea. Their comments suggest Fed bond buying will soon be coming to an end, likely resulting in higher mortgage rates by summer.

The three Fed governors all voiced concern that continued monetary stimulus is creating imbalances and outright bubbles in everything from stocks to real estate to corporate bonds.

In a speech in Mexico City, Dallas Fed President Richard Fisher said central bank stimulus is stoking asset-price bubbles that “may result in tears” for investors.

Fisher caused a stir last month by likening the distorting effect of monetary stimulus to beer goggles. If anything, his view seems to have hardened in the intervening weeks.

“There are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive,” he said of the Fed’s stimulus program, also known as QE.

“I fear that we are feeding imbalances similar to those that played a role in the run-up to the financial crisis.”

Philadelphia Federal Reserve President Charles Plosser weighed in the next day with similar concerns.

“I am very worried about the potential for unintended consequences of all this action. And it's very difficult for us to know because we've never done this before,” Plosser said, adding that reducing stimulus would be “very challenging.”

"I would like to see over time, central banks to gradually pull themselves in to the background, because we are not the panacea, we are not the silver bullet," he said.

Hours later, Dennis Lockhart, the Atlanta Fed President, seemed to be singing from the same hymn book, stating flatly that stimulus must be wound down even in the face of January and February’s weak economic data.

"In my mind, unless we really fall off track in the economy pretty dramatically, I think the tapering program should proceed," Lockhart said in an interview with Reuters.

Homebuyers should take note of what Fed officials are saying, because Fed bond purchases have been holding down interest rates for the last year and half. If the Fed follows the advice of hawkish members such as Fisher, Plosser and Lockhart, mortgage rates will certainly go up.

Standard 30-year fixed rate mortgages stayed well above 6 percent in the years leading up to the financial crisis, and those levels could easily be seen again if the economy continues to improve and the market is allowed to work without Fed intervention.

Of course, what this means for the housing market remains to be seen – higher prices and rising mortgage rates have already crimped affordability in many metro markets across the country. Homebuyers will have to weigh the risk of higher mortgage rates down the road with the possibility that prices could take a tumble when such a move takes place.