BILL GROSS: The Fed Will Keep Interest Rates 'Lower Than Expected For A Long, Long Time'
Gross looks back at what the recent uptick in rates did to the housing market:
...The critical question to ask in terms of the level and eventual upward guide path of the policy rate is how high a rate can a levered economy stand? How much wood can a woodchuck chuck? How high a rate can a homebuyer handle? No one really knows, but we're beginning to find out. The increase of over 125 basis points in a 30-year mortgage over the past 6-12 months seems to have stopped housing starts and importantly mortgage refinancings in its tracks. It was the primary "financial condition" that Chairman Bernanke cited in his September press conference that shifted the "taper to a tinker to a chance" that maybe they might do something next time.
The 30-year mortgage rate of course is connected to the policy rate and its pricing in forward space. All yields in composite are what an economy has to hurdle in order to grow at historically hoped-for rates at 2-3% real and 4-5% nominal: Treasury yields, mortgage yields, corporate yields and credit card yields, all in composite....
Ever since the financial crisis, the U.S. housing recovery has been one of the most encouraging economic stories in the world. Below is a chart of the refinancing activity Gross is referring to via Calculated Risk:
"If you want to trust one thing and one thing only, trust that once QE is gone and the policy rate becomes the focus, that fed funds will then stay lower than expected for a long, long time," added Gross. "Right now the market (and the Fed forecasts) expects fed funds to be 1% higher by late 2015 and 1% higher still by December 2016. Bet against that. "
Read the whole letter at PIMCO.com.