The Wall Street Journal
There's no end to the potential knock-on effects from the Federal Reserve's superlow interest-rate policies.
Consider housing. The Fed hopes to prod home buying by driving mortgage rates to record lows; Freddie Mac reported Thursday that the average rate for a 30-year, fixed mortgage had fallen to 4.27%. Yet purchase activity still is muted. And even if rock-bottom rates do eventually prove a tonic, they may turn into another albatross around the neck of the housing market.
Should housing and the economy revive, interest rates likely will rise. This will make mortgages more expensive, possibly damping any rebound in home prices. It also could crimp volumes. Even those who want to sell their house may balk at giving up their supercheap 30-year debt.
Just as many would-be sellers feel unable to move right now because their mortgages are underwater, this could hobble mobility even as the economy recovers. In a 2008 study, three New York Fed staffers found that "a $1,000 higher real annual mortgage interest cost is estimated to reduce mobility by 2.8 percentage points." That is equal to about 25% of the normal, baseline mobility rate.
That also bodes ill for employment growth, which requires workers to be flexible in moving to find jobs. Further proof, perhaps, that there is no free lunch, even for the Fed.
Consider housing. The Fed hopes to prod home buying by driving mortgage rates to record lows; Freddie Mac reported Thursday that the average rate for a 30-year, fixed mortgage had fallen to 4.27%. Yet purchase activity still is muted. And even if rock-bottom rates do eventually prove a tonic, they may turn into another albatross around the neck of the housing market.
Should housing and the economy revive, interest rates likely will rise. This will make mortgages more expensive, possibly damping any rebound in home prices. It also could crimp volumes. Even those who want to sell their house may balk at giving up their supercheap 30-year debt.
Just as many would-be sellers feel unable to move right now because their mortgages are underwater, this could hobble mobility even as the economy recovers. In a 2008 study, three New York Fed staffers found that "a $1,000 higher real annual mortgage interest cost is estimated to reduce mobility by 2.8 percentage points." That is equal to about 25% of the normal, baseline mobility rate.
That also bodes ill for employment growth, which requires workers to be flexible in moving to find jobs. Further proof, perhaps, that there is no free lunch, even for the Fed.
