The People vs. The Economist: Whose Crystal Ball is Clearer?

The Market

September 18, 2023

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Adam Foley

The conversation around interest rates is buzzing, and it seems like everyone has an opinion on where they’re heading. Perhaps the most fascinating differing opinion is that of the general public’s outlook compared to the views of seasoned economists.

The 2023 Consumer Expectations Housing Survey by the New York Fed shed some light on this. Respondents were asked, “Where do you expect mortgage rates to be one year from now?” The collective response was astonishing, with households predicting rates would escalate to an impressive 8.4%.

For context, in the 2022 survey, participants anticipated rates would reach 6.7%. Intriguingly, this was almost spot-on, as rates were hovering around that figure at the onset of March. It’s a potent reminder that the predictions of the general public can sometimes mirror reality just as accurately as those of specialists, if not more accurately.

When posed with the follow-up, “Where do you believe mortgage rates will be three years from now?” the consensus was a staggering 8.8% – a figure not seen since 1995’s early months.

A few months back, three esteemed economists had firmly forecasted a housing market cooldown within the year. Now, sensing shifts, they’re revising their predictions, anticipating a longer duration before any market equilibrium. Yet, the majority of economists still foresee the market stabilizing faster than the public’s expectations.

From my viewpoint, it’s clear that interest rates will eventually go down, especially when inflation is kept in check. In the past, central banks have often lowered interest rates to boost borrowing and investment during stable inflation periods. This helps the economy grow. Plus, with prices steady, people’s money holds its value, which lessens the need for high-interest rates. The real question is: when will this shift occur?

So, the million-dollar question remains: Whose perspective should you trust when it comes to the future of interest rates? Is it the collective wisdom of everyday individuals, or should we put our faith in the seasoned predictions of economic experts? It’s a puzzle that warrants our attention as we navigate these diverging perspectives, eagerly anticipating how the financial landscape will evolve.

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