The financial analysts think they have it figured out. After listening to U.S. Federal Reserve chair Janet Yellen's speech and her wily answers to questions from reporters, the consensus seems to be that a rate rise is coming later this year — the first one probably in September.
While that date is of crucial interest to market wheeler-dealers, for Canadian mortgage-holders Yellen had a far more important message. It is especially important in a week when Manulife warned that for many home owners, a rate hike could be trouble.
While a large majority of Yellen's advisory committee agrees that the economy will require a rate rise before the end of the year, Yellen herself said the exact moment of such a rise really doesn't matter.
"The importance of the timing of the first decision to raise rates is something that should not be overblown, whether it is September or December or March," said Yellen in response to a question. "What matters is the entire path of rates."
Of course neither Yellen nor the rest of the Federal Open Markets Committee members actually know for sure where the economy is headed. All they can do is make their best guesses, based on examining all the latest economic indicators, then sort of sum up to come to a collective conclusion.
As Yellen said yesterday, the committee's best guess is that the U.S. economy has begun expanding moderately after a sickly first three months of the year. Jobless figures show that the supply of surplus labour is gradually being used up.
Consumer spending is still pretty soft, they conclude, but the housing market has perked up. On the downside, business investment in plant and equipment remains soft. So do exports.
Yellen and her team conclude that energy prices seem stable for now, and that as the economy adjusts to those new prices, the price-lowering effect of cheap oil is going to wear off.
In other words, toward the end of this year prices will begin to rise, and the U.S. central bank will once again have to worry about inflation.
"To my mind the most important positive is that a decision to raise rates would signify very clearly that the U.S. economy has made great progress in recovering from the trauma of the financial crisis and that we are in a different place," said Yellen.
Surprisingly exact information
And while the data is uncertain and the date of the first increase will depend on how the economy develops, Yellen had some very useful, and surprisingly exact, information for Canadians who have made the long-term commitment of a mortgage. It is also useful for anyone considering splashing out their first down payment.
The reason it is so useful is that the exact month of a single quarter-point hike in rates won't make or break the average homeowner. It is the long-term trend that matters. And on that, Yellen was very clear on what the participants in compiling the FOMC data concluded.
"Participants are projecting — of course there's a lot of uncertainty — but they're projecting increases that average around 100 basis points per year," said Yellen.
For those not familiar with the lingo,100 basis points means an increase in rates of one percentage point.
Canadian short-term mortgage rates are not perfectly tied to the U.S. Fed rate. Long-term rates, however, are tied to U.S. bond rates that rise with the official Fed rate. Short-term rates tend to follow.
For Canadians on the hook for a mortgage or other long-term debt, Yellen makes calculating the approximate safety margin you need pretty straightforward.
Everyone's mortgage and income are different, and you know the details of your own finances.
But the general rule that Yellen offered us is this. Whatever the size of the principal amount you owe, multiply it by one per cent. And for every year until the U.S. economy and U.S. inflation get back to normal, add that amount to your yearly payment.
Then after your calculations, start thinking about where that extra money is going to come from.
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