Bad news is often good for interest rates. Good news not so much, especially when it comes to an effective COVID-19 vaccine for the world.
Shortly after the news broke that U.S. drugmaker Pfizer was to release a 90 per cent effective Covid-19 vaccine, the Dow Jones industrial average soared more than 1,500 points, with the Toronto stock market also taking off. The price of oil rose 10 per cent.
The joy has not been universal, however. While shares in airlines and cruise lines gained value, companies like Zoom that have profited from coronavirus lockdown restrictions were battered by the news. Yet there is also another group for whom the news about the vaccine was a mix of good and bad: borrowers.
As mortgage holders and prospective home buyers know too well, bad news is often good for interest rates. Good news not so much.
This year central bankers around the world have cut rates to what the U.S. Federal Reserve calls the “effective lower bound”—in other words, as close to zero as possible—to help the economy struggle through the Covid-19 crisis and lockdown. Federal Reserve chair Jerome Powell has forecast a long wait for recovery, saying he and his panel of advisers would keep rates low even after inflation had climbed above the bank’s two per cent target and jobs started to return.
But while central bankers may not be thinking about hiking rates, the sudden surge of optimism that the pandemic could be over in the reasonably near future means that borrowers must at least think about the thought that rates will not stay near zero forever.
President-elect Joe Biden’s likely pick for Treasury Secretary and former chair of the Fed, Janet Yellen, knows a lot about the difficult job of raising rates.
But once in a political role, she might be inclined to support what will inevitably be a painful and unpopular, if necessary, process of raising rates in time for the economy to adjust before Biden or his successor goes back to the polls.
The good news is that a vaccine seems to be within reach—and with it, a return to normal life and a healthy economy in the long term.