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Melaschasm (65.72)

T-Bills and Interest Rates

Recs

4

March 29, 2011 – Comments (2) | RELATED TICKERS: TLT , TLH , TLO

Currently interest rates in the USA are near historic lows.  It seems very likely that rates will be higher at some point in the next five years.  I have already mentioned this and the reasons in my red thumbing long term T-Bill funds.  In this blog I will attempt to make a more detailed prediction about the future rate changes.

2011 Fed policy.  QE 2 will end soon, but it is likely to take all of 2011, and maybe longer to reverse QE 1 & 2.  With inflation inching up, and the economy doing a little better, the Fed is not likely to try QE 3.  It is possible that we will see a Fed Funds Rate increase between ¼ to ½%.  The Fed is going to try for a slight tightening of policy, without making any aggressive moves which could push us back into recession.

2012 is a presidential election year.  Usually the Fed is less aggressive in fighting inflation during an election year because they do not want to appear to be influencing the election.  I think we will see a ¼ point increase in rates early in 2012 as inflation rates remain stubbornly high.  Depending upon how big the inflation issue becomes, we could see a second quarter point increase in the summer of 2012.  While we might see a spring increase as well, that seems like it will be overly aggressive for a presidential election year.  Unemployment rates will probably be falling during 2012, which will increase the concerns about inflation, as will gas prices running above $4.  As soon as the election is over, Fed policy will shift to more aggressively fight inflation.

 2013 will be an inflation fighting year.  The Fed will be aggressive, by raising interest rates every three months, and talking tough.  Despite the aggressive rate increases, inflation will continue to rise.  This year should show moderating commodity price increases, with strong housing price increases. 

2 Comments – Post Your Own

#1) On March 29, 2011 at 5:26 PM, leohaas (98.77) wrote:

Nice prediction. It would not surprise me if most of it came true.

Just one question: what makes you think housing prices will increase strongly in 2013? Considering the number of foreclosures  still to come and the expected increase in interest rates, I highly doubt that one.

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#2) On March 30, 2011 at 10:59 AM, Melaschasm (65.72) wrote:

Very few houses are being built.  By the middle of 2012, we should have worked through most of the foreclosures.  Prices will probably experience a few small bumps upwards, with each price increase bringing a big increase in supply, as people test the market.

By 2013, people will be more confident in the economy, and secure in their jobs.  This will unleash significant pent up demand for housing, as people are more confident.  Many people are waiting for a definate bottom, and the when they realize that prices are trending up, they will be in a hurry to buy.  After the 2012 elections the Fed will be talking tough about inflation, so many buyers will try to lock in low interest rates.  As bad as the economy is, about three quarters of the USA workforce will manage to stay employed during the recession, and many will be making more money in 2012 than in 2006.  This will be the source for much of the increased demand in 2013.

All of these predictions assume that we do not experience a severe double dip recession.

While there is no way to know the future with certainty, my predictions are not to far from historical norms.  In the past 100 years there have only been a few 10 year time frames where home prices were not  higher at the end.  By 2016 house prices should be significantly higher than the 2006 peak, which means we will need big price increases in 2013 and 2014 to get prices close to 2006 levels in 2015, and higher in 2016.

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