You've waited a year for rates to come down. Greg Ip has some news. In Wednesday's Journal he argues that rates aren't high at all. By the bond market's own math, they're low. The Fed's target sits at 3.75% to 4%. Ip says that level, or higher, should now count as normal.
Here's the argument. Economists call it the 'neutral' rate. Think of a thermostat set where the house feels right. Neutral is the rate that keeps growth, jobs and inflation steady. In September the median Fed official put that long-run rate at 3.2%. Today's target is well above it. That's why many officials called rates 'restrictive.' It means they hold the economy back.
Ip doesn't buy it. Nobody can see neutral directly. You have to read it from the economy and the markets. Neither one acts restricted. Growth is solid. Stocks are near a record. Big companies are raising billions of dollars without much trouble.
What the bond market thinks
One way to find neutral is to ask the bond market. A New York Fed model, built by economists Tobias Adrian, Richard Crump and Emanuel Moench, splits the 10-year yield into two parts. One part is where short rates are expected to go. The other is the extra pay investors want to lock up money for years. As of last week, the model says markets expect short rates to average 4.3% over the next decade. Measured that way, today's rate is low.
Chairman Kevin Warsh has played down the whole idea of neutral. But he has said financial conditions don't look restrictive. Ip reads that as comfort with higher rates. The Fed raised rates last month, and Ip expects another increase this week or soon. The decision isn't in our papers, so we won't guess at it. Ip does offer one bright spot. If normal rates are higher, he says, normal growth is probably higher too.
Our read
This is fixed income (IN02), and it's also about every loan you carry. Tuesday's close had the 10-year Treasury at 4.992%. Bankrate's 30-year mortgage sat at 7.35%. If Ip is right, those numbers aren't a spike that fades once oil and inflation calm down. They're closer to the new normal. That changes the math on waiting. A refinance you've put off until rates drop may need a different plan. The flip side is kinder to savers. A 13-week Treasury bill paid 4.050% at Monday's auction. Cash sitting in a checking account is leaving that on the table. In the model books, short Treasury bills (SGOV) are held in 49 books and the 7-to-10-year fund (IEF) in 11. Nothing added.
The one thing in your plan this touches is the rate you assumed on your debt and your cash. The check this week is simple. Pull your mortgage rate, your car loan rate and your savings yield onto one page. If any part of the plan still counts on a big rate cut, rewrite it for 4% short rates and 7% mortgages. The umbrella doesn't help much once you're soaked. Check the sky now.