Tag: inflation

To accommodate, or not to accommodate? To restrict, or not to restrict?


Markets do not optimally function when interest rates are too low. Markets do not optimally function when interest rates are too high. The housing market – as well as the home loan market – would be two markets where this point can be most easily seen. 


Artificially-low interest rates create an overly-accommodative economy. The consequences for which we see in today’s stubbornly non-ignited housing market. Mortgage rates are not high today. They’re just a lot high-er than they were during the Pandemic. But mortgage rates today are certainly not anywhere near what we should classify as, high. 

The ’70s’ would be one example we could use to illustrate how markets malfunction when interest rates are, first, too low, then, later, increased. Increased too much. Too fast. 

There were points in time during the 1970’s where the country was actually in a negative interest rate environment. Bank deposits were yielding “storage charges,” so you speak. As opposed to throwing off interest income.

The low-rate environment in the 1970’s came about in many ways because the stock market was in shambles. The result of that market unease of the ‘70’s? The Fed enacted an easy money policy. The idea at the time being, to attain full employment. Overly-accommodative. This was a flawed approach. Which became highly inflationary.

Enter price controls? Yep. Did you ever make one mistake, then double-down, only make to make your second mistake? In succession? An easy money policy followed by price controls? That ill-advised combination did not work out so well.


So by the late ’70’s, with the country in the midst of rampant inflation, the Fed began to ratchet up interest rates. To temper the inflation. The origin of this inflation which was now being battled was of course triggered by the overly-accommodative fiscal policy of the Fed years before. The result of moving from an accommodative fiscal policy to a restrictive fiscal policy by way of rising interest rates? The economy went into recession. 

Let’s look at another recent timeframe…

In the early-2000’s, interest rates were lowered. Interest rates became accommodative. At that time, lower interest rates were married to accommodative home loan underwriting policies.  The result? Skyrocketing home values. An increase in home loan defaults. The Financial Crisis. 

Overly-accommodative policy = a rough landing.  

Overly-restrictive policy = a rough landing. 

Overly-accommodative policy followed by overly-restrictive policy = a rough landing. 

During the Pandemic, the federal funds rate was lowered to a range of 0% to 0.25%. Mortgage rates dropped. Home prices went up. 

Fast forward to 2025…

Today, more than 75% of homeowners are nestled cozily in with a sub-5% mortgage rate. Around 55% of homeowners are nestled cozily in with a sub-4% mortgage rate. This “lock-in effect” we have in housing in 2025 is one byproduct of the low-rate policy the Fed enacted during the Pandemic.

Last year 25 out of every 1,000 homes found their way to new buyers. That was the lowest turnover rate we saw in housing in 30 years.

Accommodative policy – I.e.: low interest rates – do not only lead to future restrictive policy by way of elevated interest rates. Accommodative policy leads to the market restricting itself. Which is exactly where we are right now. 

For example…

Why sell your home when the interest rate you have on your mortgage is 4% or less? Especially when you know you’d have to go out and buy another home in the midst of a restrictive cycle – at an elevated price, no less – with a mortgage rate which would be between 6% and 7%?

A Fed rate cut…and mortgage rates went up.


Mortgage rates are at their highest levels in two months. This, after the Federal Reserve cut the federal funds rate for the first time in four years.

The Federal Open Market Committee sets a target range for the federal funds rate. The federal funds rate? The federal funds rate is the interest rate banks pay on money they – as banks – borrow from other banks.

The Fed does not directly set mortgage rates.

The Fed influences mortgage rates. The Fed influences mortgage rates through the role the Fed plays in setting monetary policy. As such, the Fed indirectly affects the interest rates borrowers lock into at the consumer level, by way of how credit spreads evolve in the market as a result of the Fed’s actions. In relation to the issuance of debt instruments. 

Credit spreads consist of the purchases of – and then the simultaneous sales of – contracts within the same asset classes. Credit spreads are not always so easy to predict. Then too, mortgage rates are not necessarily – nor definitively – so easy to predict, short term, either. Although the general direction mortgage rates will end up heading can rather accurately be predicted through actions taken by the Fed.