“Memory Lane” takes a walk in the history of finance because of the interesting habit of repeating the economy.
Buzz: Mortgage rates have hit a week-long surge since 1987.
sauce: An average 30-year fixed rate mortgage from a Freddie Mac survey.
number: Interest rates soared to 5.78% on June 16th, up 0.55 percentage points from 5.23% seven days ago. In April 1987, interest rates surged 0.84 points in a week, jumping from 9.43% to 10.27%.
How long ago?
Bottling your memory …
1987 News: Iran Contra’s scandal seizes US politics, Iraqi missiles hit USS Stark during the war between Iraq and Iran, and televangelist Jim Backer and US Senator Gary Hart both I was involved in an unfaithful scandal. Locally, the Whitiana Loews earthquake rattled the San Gabriel Valley.
Culture of 1987: Beverly Hills Cop II was the top box office revenue, and Bon Jovi’s “Livin on a Player” was number one on the charts. The first Panera Bread has opened. The Los Angeles Lakers won the NBA Championship.
Inside story
In 1986, a large federal tax card pushed by then-President Ronald Reagan put a lot of cash in an American checkbook.
At the same time, the Fed has revoked the high interest rate policy that pushed inflation down and stagnated the economy.
The federal funds rate is estimated to have fallen below 6% in the fall of 1986, after central bank control approached 20% in the first half of 10 years. This key rate was the lowest in 10 years.
Mortgage rates worked as expected, dropping to 9% in February 1987. This is the worst in 10 years. It certainly explains the 7% price increase for California homes in 1986.
And by April 1987, the broader economy had recovered from the pain of the early 1980s. The unemployment rate in the United States fell to 6.3%, the lowest in seven years.
We also paid attention to the stock market, which surged 24% in the year ended in the first quarter of 1987, recording a year-on-year increase of more than 20% for the fifth consecutive quarter.
result
Of course, all the bright news of 1987 caused one big problem. It’s inflation.
By the end of 1986, the consumer price index had risen at 1.1%. This is the lowest inflation in 20 years. But by April 1987, inflation had risen to 4% per annum.
The Fed acted swiftly. From October 1986 to October 1987, the federal funds rate was raised from 5.8% to 7.2%. Since then, mortgages have risen above 11% by October 1987 and never fell below 10% until 1991.
Oh, and in October 1987, stocks fell 20% in a single trading session — the “Black Monday” plunge.
And the house price? In California, it rose 10.5% in 1987, 16% in 1988, and 21% in 1989 (then it fell for the next six years!).
History class?
Like 2022, the story of 1987 reminds us that all the good things tend to end.
It’s not a “pessimistic and catastrophic” way of thinking. It is a realistic assumption that when a wallet is flattened, human nature tends to go outboard.
One of the reasons for such practicalism is that the Fed plays the strange role of becoming an adult in the room.
When the times are economically late, the Fed is like a bartender — a stimulus of choice, cheap money to soar the economy at will.
But when things bubbly a little, the Fed turns into a party pumper — acting like a responsible tavern owner and chilling the financial fun with the “last call” action of raising the same rate.
Jonathan Lansner is a business columnist for the Southern California News Group.He can reach at [email protected]