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Interest rates to rise as QE2 ends, economist warns in Denver

Here is a great article from a recent issue of The Denver Post.  It suggests that interest rates could begin to rise as the Federal Reserve wraps up it’s Quantitative Easing (QE2) program.  This indicates that now is a great time to consider selling or a buying a home.

Prepare for higher interest rates as the Federal Reserve ends its program of purchasing U.S. Treasurys next month, warns Wells Fargo Securities chief economist John Silvia.

Higher interest rates will put added pressure on a struggling housing market but in themselves shouldn’t derail the recovery, said Silvia, speaking at a 2011 Economic Outlook for bank clients Wednesday morning in Denver.

“If the Fed stops buying, it will be a tough situation,” Silvia said of the coming end to the central bank’s second round of quantitative easing, also known as QE2.

Silvia predicted that Treasury rates could rise by one- half to a full percentage point but in a moderate way and not resembling the big moves seen in the 1970s.

“This isn’t Jimmy Carter, but you can see where the numbers are going,” he said.

Higher rates on government debt will spill into the mortgage markets.

The average rate on a 30-year mortgage last week was 4.76 percent, according to the Mortgage Banker’s Association.

Despite that low level, mortgage applications remain anemic and home prices continue to fall in most areas.

“If you can’t sell a house now, what will you do if mortgages rates go up 100 basis points (1 percentage point)?” he asked.

Higher rates are needed to make up for the Federal Reserve’s reduced involvement. Compounding the lack of demand, China and Japan, the two largest foreign holders of U.S. debt, are seeking more diversification in their holdings.

Bill Gross, who oversees the nation’s largest fixed-income mutual fund at PIMCO, has sold off his holdings of U.S. Treasurys and is urging investors to do the same.

When the Fed stepped back last year, growth slowed and stock markets fell, resulting in further quantitative easing.

Wells Fargo Securities is predicting growth in U.S. gross domestic product of 2.4 percent this year and 2.8 percent next year, driven by strong business investment, rising U.S. exports and modest consumer spending.

Silvia predicts that gasoline prices could rise another 10 to 20 cents a gallon through Memorial Day and early June, taking an additional bite out of discretionary spending.

Higher fuel costs also could reduce the number of people jumping in their cars to visit Colorado this summer.

“The number of visits may be less than expected,” he said.

Read more: Interest rates to rise as QE2 ends, economist warns in Denver – The Denver Post http://www.denverpost.com/business/ci_17995220#ixzz1Nxlq6EPj
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