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Last Week in Review: Three Things We Learned From Federal Reserve

This past week, the Federal Reserve raised the Fed Funds Rate by .75% and issued its quarterly economic projections. In response, home loan rates ticked up to a new 2022 high. Let's discuss three things we learned from the Fed Meeting and what to watch in the weeks ahead.

"In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3.25 percent and anticipates that ongoing increases in the target range will be appropriate."  Fed Statement Sept 21, 2022.

1. The Federal Reserve Is Not Very Good At Forecasting

The .75% rate hike lifts the Fed Funds Rate to a range of 3 to 3.25%, the highest since Jan 2008. This increase will affect short-term loans like credit cards, autos, and home equity lines of credit.

Along with the rate hike, the Fed released its quarterly economic projections. This means every three months they update their projections on economic growth, inflation, and the path for interest rates.

If you follow what they have forecasted for the past couple of years, it's clear the Fed has underestimated inflation, overestimated economic growth, and underestimated how high they want to raise rates.

Back in June, the Fed forecasted economic growth to be 1.7% for 2022. Three months later, they now see the US growing at a slim 0.2% level. Also back in June, the Fed had forecasted Core inflation to be 4.3% for 2022. Now they expect inflation to be higher at 4 to 5%.

Lastly, on the Fed Funds Rate, the Fed expected the rate to increase to 3.4% back in June. Now, the Fed sees the Fed Funds Rate at 4.4%.

The market's reaction – lower stocks and higher rates mimic the uncertainty and volatility we hear from the Fed and economic readings.

2. The Federal Reserve Can't Say Recession

Despite downgrading economic growth at each of the last few quarterly projections and the Atlanta Fed forecasting 3rd quarter GDP to be just 0.3% on the heels of a contraction in the first half of 2022, The Fed has never used the word recession to describe where the economy is or where we are headed. The Fed reiterated that we will all feel economic pain because of their inflation-fighting efforts. He also said the chances for a soft landing are slim. All of this means, the US economy may already be in a recession and headed towards something potentially worse as the Fed also wants to create some unemployment.

Seeing the 2-yr yield rise to 4.11% and well above the 10-yr Note means the bond market is telling us the economy is headed towards a recession, despite our central bankers' inability to utter the word.

3. Higher For Longer

Fed Chair Powell reiterated several times during his press conference that the Fed will raise rates higher and hold them elevated until inflation comes back down to the Fed's target of 2.00%.

The markets are currently pricing in yet another .75% hike in November and a .50% hike in December. This could change if we see a softer inflation reading or surprisingly soft labor market or growth readings.

A reminder - the Fed only controls a short-term overnight rate and long-term rates like the 10-yr Note, which will signal how high and long rates will stay elevated. Seeing a wide yield curve inversion between the 2 and 10-yr Notes suggests the economy will have a difficult time absorbing the hikes without a recession.

Bottom line: The 10-yr Note yield closing above 3.50%, means we should not expect much or any improvement in rates in the near term. We now have to follow the incoming data carefully, which should tell the bond market and The Fed whether economic conditions warrant higher rates.

Last Week in Review: Prices Still Rising, Fed Still Hiking

We saw some surprisingly hot inflation numbers which hurt the financial markets and pushed rates to the highest levels of 2022. Let's walk through what happened and look into the week ahead.

Inflation Remains High

Last Tuesday the Consumer Price Index (CPI) was released, and it showed inflation remains high and a problem for consumers, the economy, and the Federal Reserve.

The headline CPI, which includes food and energy costs came in at a hot 8.3% year over year, higher than expectations of 8.1%. This number remains near a 40-year high despite getting some relief at the pump. The more closely watched Core CPI number, which removes food and energy, came in at 6.3%, a big month-over-month jump from 5.9% in July.

What caused Core CPI to jump so high? The housing component, which makes up 31% of CPI rose a lofty 0.7% for the month. This tells us that inflation will remain higher longer than we would like.

No Fed Pivot

Stocks were rallying into the CPI release, sensing and "pricing" in a softer inflation number. Upon seeing the higher reading, the Dow had its 7th worst daily loss in history. This is because the high CPI means the Fed will continue to hike rates to slow demand, which sharply elevates recession fears.

Further proof of the concern is seeing the 2-year yield spike to a 15-year high at 3.80%, which remains well above the 10-year yield of 3.44%. This wide yield curve inversion portends a recession.

The Good News

We all must remember that the Fed is raising rates to slow inflation, create unemployment, slow demand, and lower asset prices...all of these are good for long-term bonds and home loan rates. It is why we are seeing the 10-year yield rise as high as the 2-year.

There is a limit to how high long-term rates will go, and we could be nearing the limit.

The 10-year yield, while up slightly this week, remains below the 2022 peak seen in June. An important level to watch is 3.49%. If the 10-year yield moves above this important ceiling, rates will move up another level. If it can stay beneath this important marker, there is an opportunity to see that these will be the peaks for the year.

Bottom line: The Fed controls the overnight Fed Funds Rate and that rate is going higher next week. Longer dated Treasuries, like the 10-yr Note, control the Fed and right now we are seeing those long-term yields resist going higher because the global economy is sliding towards recession. It remains a great time to secure a home loan that is lower than the current rate of inflation.

Last Week in Review: Financial Markets Attempt to Stabilize

After several weeks of higher rates and lower stocks, the financial markets stabilized a bit. Let's walk through what happened and look into the week ahead.

When Words Don't Matter

"I am more focused on if balance sheet reduction will affect liquidity in markets than impact on fed funds rate. Fed should contemplate selling Mortgage Backed Securities (MBS)" Cleveland Fed President Loretta Mester, September 7, 2022.

This quote is reminiscent of the Fed jawboning that has hurt stocks and elevated long-term rates throughout the year.

However, last week it had no effect as the bond markets did say enough is enough with rates improving a touch year over year.

"The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months." Fed Beige Book September 7, 2022.

The Fed Beige Book is gathered by the Federal Reserve Bank of San Francisco from districts around the country and represents comments from different communities. One of the big takeaways from the "Beige Book" is this quote where people across the country are expecting a further slowdown in economic growth or elevated threat of a recession. They also expect demand to decline, which is what the Fed wants as less demand means lower prices or lower inflation.

Lower Oil Prices Means Lower Inflation

The price of a barrel of oil hit $82, well off the 2022 highs of $130 and the lowest levels since February. The main drivers for the consistent drop in price are elevated global recession fears and the U.S. Dollar trading at the highest level in decades, thanks to the tough talk and action by the Federal Reserve. Should Oil prices continue to decline, we should expect headline inflation, where energy is a main input, to decline as the Fed wants.

The ECB Goes BIG

Last Thursday, the European Central Bank (ECB) raised their benchmark deposit rate by .75% matching the largest increase in their history. The Euro region is struggling economically and will also be challenged to avoid a recession. If Europe and other countries around the globe struggle, it makes our U.S. Dollar and Treasury yields look relatively attractive, meaning, there will be a limit to how high long-term rates will go.

Bottom line: Much like the Fed did in the first half of the year they are "jawboning" the market by saying they will continue to raise rates and be very aggressive in doing so. The only rate they can raise is the Federal Funds Rate. With recession fears escalating there will be a limit to how high interest rates will go and we are watching the June rate peak as a ceiling for 2022.

Last Week in Review: What's Happening in The Markets?

The financial markets had a rough week, with stocks falling and rates spiking since Fed Chair Powell spoke in Jackson Hole. Let's walk through what happened and look into the week ahead.

"While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses." Fed Chair Jerome Powell – Friday, August 26, 2022.

This line set off the selloff in stocks and bonds and continued throughout this week.

The 2-Yr note which attempts to mimic fed interest rate activity, spiked to the highest level in 15 years. Mortgage-backed securities (MBS), which are where home loan rates are derived, fell sharply causing home loan rates to rise to the highest levels since June. And in a sign that a recession is here or forthcoming, the 2 and 10 year note yields remained deeply inverted suggesting pain is here and will likely continue.

On top of the Fed Chair's tough talk, we also had several Fed officials talking very hawkish which further stoked the rate hike fears. As of today, the chance of a .75% rate hike at the end of September is essentially fully priced in. This means that the Fed Funds Rate, which is an overnight rate, will be higher than the 10-year Note yield. This is typically a negative sign for the economy.

And if this were not enough pain for the bond market, we are now into September, where the Fed is slated to ramp up balance sheet reduction to the tune of $95B per month. This means the Fed will be providing even less support for the bond market. There is no clear formula on what the impact of balance sheet reduction will be on the economy. This adds to the uncertainty, volatility, and pain we are seeing in the financial markets.

Bottom line: Much like the Fed did in the first half of the year, they are "jawboning" the market by saying they will continue to raise rates and be very aggressive in doing so. The only rate they can raise is the Federal Funds Rate. With recession fears escalating, there will be a limit to how high interest rates will go and we are watching the June rate peak as a ceiling for 2022.

Last Week in Review: Rising Rates and New Home Sales

August has not been kind to bonds and interest rates. Even though the Federal Reserve did not hold a meeting in August and is not slated to raise rates again until the end of September, long-term rates moved higher. Let's break down what happened and look into the week ahead.

Rate Volatility and Uncertainty Continues

Mortgage-backed securities (MBS), where home loan rates are derived, have declined since the beginning of August, losing nearly 200 bps through this week. As prices decline, rates move higher. This drop in MBS prices pushed home loan rates higher by .50% and more.

The continued volatility and uncertainty centered around whether inflation has peaked, if the labor market is softening and what the Fed is going to do about it...hike rates and shrink their balance sheet.

On the balance sheet reduction front, come September, the Fed is slated to double the current caps to $95B. What does this mean? Starting next month, the first $60B in Treasuries and $35B in MBS proceeds the Fed receives through bond maturing, refinance or purchase activity will be given back to the Treasury rather than reinvested in bonds. This is how the Fed will shrink the balance sheet by $95B per month.

It is worth noting that balance sheet reduction or Quantitative Tightening is not tested and there is no formula as to its impact on the economy, so the Fed is going to proceed with this enhanced $95B monthly runoff until something weird happens in the financial markets just like it did in their previous attempt to shrink the balance sheet back in 2018. This underlying uncertainty as our economy slows is also unnerving for both stocks and bonds.

Yield Curve Remains Inverted

The 2-year yield (3.34%) has been higher than the 10-year (3.07%) for weeks and hit nearly .50% which is the widest inversion in this century. Every time this inversion has emerged over the last 50 years it accurately preceded a recession. We are either in a recession or at its doorstep and future readings will tell.

New Home Sales Recession

New Home Sales in July plummeted to an annual rate of 511,000, representing a year-over-year decline of 29.6%. The supply of new homes available to sell increased to a 10.9-month supply; the largest since March 2009. August's reading could also be bad considering rates spiked sharply.

The Fed was looking to remove froth from housing, and it appears that goal has been accomplished. The recent weakness in housing was necessary and healthy for the long-term market. The pace at which home prices were rising was unsustainable.

As far as new home sales go, builders are going to proceed very slowly, if at all, on new projects until inflation, rates, and the 10.9 month supply ease. This soft patch in new home sales provides a great opportunity for a buyer as new incentives are emerging around the country to help move inventory.

Oil Back Above $90 a Barrel

Oil, the main input in headline inflation is back on the rise, having eclipsed $94.00 a barrel. If inflation continues higher it will embolden the Fed to increase rates further. But remember, the Fed controls short-term rates. The Treasury market and long-term rates tell the Fed what to do and with the yield curve inverted, it is saying the economy is slowing and we can't afford much higher rates.

Bottom line: Home loan rate improvement has stalled of late as financial markets try to figure out whether inflation has peaked and how far the Fed will go with rate hikes. Until the next Fed Meeting, we should expect more uncertainty and volatility. Meantime, there are many opportunities in housing as we see increased inventory and price reductions.

Last Week in Review: We Are Going to Jackson

For the past couple of weeks, interest rates remained within a range and haven't moved higher or lower, seemingly waiting for the next big market event. That event could be soon as Central Bankers around the globe and our Fed Chair Jerome Powell are set to speak at the Jackson Hole Symposium in Wyoming.

Inflation Reduction Act Becomes Law

Last Tuesday, President Biden signed the Inflation Reduction Act. The $750B plan has a host of new taxes and spending measures in hopes to lower prices for everyday Americans while pushing forward with cleaner energy initiatives.

Bonds and interest rates do not like inflation as evidenced by the doubling of rates in the 1st half of 2022. So, any reduction in inflation would be a welcome development for those who invest in bonds or are looking to borrow money. Leading into the signing and the initial market response thereafter showed no meaningful response.

It will be some time before we see the economic impact of this new law. With the 1st half of 2022 showing the US in a recession, hopes are for a resumption of economic growth, and inflation coming down over time.

New Home Construction Slumping

Housing Starts and Building Permits are slowing with the latter showing a surprisingly bad 9.6% decline month over month when the markets expected just a 2.0% decline. New home construction and sales make up a much smaller portion of the overall housing market, but the slowdown will have a negative impact on available housing inventory until the market finds balance. As the old saying goes...the cure for higher prices is higher prices. Home sale prices have declined offering potential home buyers a great opportunity, especially with rates having retreated since mid-June.

Oil Falling Beneath $90 a Barrel

Rising energy and daily essential costs have been the main culprit for high inflation and the economic slowdown in the first half of 2022. We are continuing to see signs of relief at the pump as oil has fallen from $124 a barrel to $87.

Oil prices decline in one of two ways:

1.) We create more supply

2.) Demand decreases through an economic slowdown

In China, they are struggling with both continued Covid lockdowns as well as a serious economic slowdown. This was a reason for the decline in oil this week. If oil continues to decline, it will go a long way to helping consumers regain their footing. With the savings rates declining, we need to bring consumers more relief on energy and daily essentials.

Bottom line: Home loan rate improvement has stalled of late as financial markets try to figure out whether inflation has peaked and how far the Fed will go with rate hikes. Until the next Fed Meeting, we should expect more uncertainty and volatility.

Last Week in Review: Inflation Cools, Market Drools

This past week an important reading on consumer inflation showed that we might have seen inflation peak in July. In response, the financial markets celebrated with stocks shooting higher and long-term rates ticking lower from the previous week's highs.

The highly anticipated Consumer Price Index (CPI) was reported last Wednesday and showed the headline CPI, which includes energy and food prices, was unchanged or 0.0% on a month-to-month basis, lowering the year over year rate to 8.5%.

This was a welcome sign, as inflation is half of the Fed dual mandate, which is to maintain "price stability". If inflation cools, it will take pressure off the Fed to hike rates aggressively in the future - hence the sharp rally in stocks.

What caused the drop in inflation pressures? A material decline in oil prices, which have fallen to $90 a barrel from recent highs of $124. Oil and high energy costs have been a major input in consumer inflation, so if prices recede further, it will go a long way to more inflation relief which will lead to lower rates.

Far From Out of the Woods

Some folks are saying inflation is zero, which might sound comforting in certain political environments, but inflation is still running at 8.5%, which was a level last touched in March and remains the second highest reading in over 40 years.

A lot of geopolitical concerns in Russia/Ukraine could have an impact on oil prices going forward. If things get worse this winter where demand is high, it could easily push prices higher. On the other hand, the increasing fears of an extended slowdown and less demand, which has played a big part of the recent price decline, could lead to further relief at the pump and less overall inflation.

Another concern is wages continue to rise sharply and stocks have made an impressive rebound over the past few weeks...this could lead to higher inflation lingering around longer than hoped.

Fed Rate Impact

The probability of a .75% rate hike to the Fed Funds Rate in September dropped sharply in response to the cooler inflation data. This could change as more economic data comes in over the next few weeks. This means we should expect more uncertainty and market volatility ahead.

Bottom line: Home loan rates are well off their June peaks. Ironically, the rate improvement started the moment the Fed raised the Fed Funds Rate by .75% for the first time in 28 years. With rates having improved, more housing stock coming to market in some areas and home price gains slowing. Now is a great time to consider purchasing a home.

Last Week In Review: Fed Rate Hikes Push Home Loan Rates Lower

Last week home loan rates continued to gradually improve since the Fed hiked rates by .75% in both June and July. The elevated chance of a recession and the Fed hiking rates into the slowing economy has pushed rates to the best levels since April. Let's break down what is happening and what to look for next week.

Don't Be Fooled

The media will talk about the Fed hiking rates and allow viewers to believe that it includes home loan rates. The Fed can only control short-term rates with the Fed Funds Rate.

Since the Federal Reserve began raising rates in June home borrowing costs have declined. Why? Don't higher rates from the Fed equal higher borrowing costs? Not necessarily. The Fed controls short-term rates like credit cards and car loans and the like, not long-term rates such as mortgages. As we said in the past, Fed rate hikes are intended to cool inflation, slow economic growth, and slow down the labor market. If inflation cools, the economy slows, and the unemployment rate ticks up...long-term rates move lower.

Long-Term Rates are Talking

The 10-year note is at 2.67%...pricing in a slowing economy and less inflation. Bank of America was out last Wednesday saying they see the 10-yr yield going to 2.00% as economic conditions slow.

When we think about higher rates, the only way long-term rates like the 10-year note and mortgages move higher is if the economy can absorb those rate hikes. With that said, if the economy was performing strongly and inflation was going to be a long-term problem, long-term rates would already be higher.

Energy

High energy prices have played a large role in slowing down the economy. This has consumers paying much more at the pump and for daily essentials. Oil prices have come down with a barrel at $90. Why? There are only two ways energy prices move lower. 1 - we create more supply or 2 - fears of a recession emerge. We are now staring at the latter. If energy prices break beneath $90, there is room that it will lead to further relief at the pump and less inflationary pressures which is good for long-term rates like mortgages.

Sliding Home Prices

The onset of a recession has impacted the housing market. Housing has finally seen some relief from skyrocketing home price gains in recent days as the CoreLogic Home Price Index in June saw a 18% year-over-year increase, down from the 20% plus gain seen in May. Another report showed that home prices cooled at a record pace in June. Big gains are not sustainable with historical percentage gains at 3.5% - 5%. CoreLogic is forecasting a 4.3% gain in home prices from June 2022 to June 2023. But low inventories are still plaguing the sector with the number of homes for sale on the market now 49% below levels seen in July 2019.

Volatility Remains

The next Fed meeting is in September. Up until that time, there will be several inflation readings and key economic reports for the Fed to consider. How these reports go may very well determine if and how much the Fed will hike rates. This will make the next few weeks very volatile in the bond market and interest rates. Again, if the Fed continues to hike rates into a slowing economy, it is likely we may see another downtick in home loan rates.

Labor Markets Slowing?

In the labor markets, The JOLTS report showed that there are 10.7 million jobs available across the nation, down from the recent number of 11.5 million as the job market is starting to flow. However, there are still 1.8 million open jobs per available worker with almost 6 million Americans unemployed. Outplacement firm Challenger, Gray & Christmas reported this week that job cuts in July were up 37% from July 2021.

"The job market remains tight, and large-scale layoffs have not begun. There are some indicators that hiring is slowing after months of growth, however." said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

Bottom Line: Home loan rates have appeared to make their peak back in mid-June. With more housing inventory coming to market, now is a great time to capture the home of your dreams with prices and rates off the highest levels of late.

The Federal Reserve raised the Fed Funds Rate by .75% in a widely expected move while home loan rates continue to be well off the highest levels in June. Let's discuss what the Fed Chair Powell said in his press conference and what it means going forward.

Boom

The Fed raised the Fed Funds Rate in back-to-back meetings by .75% or more for the first time since 1980 when Magic Johnson guided the Lakers to an NBA Championship as a rookie.

This rate hike has no effect on home loan rates. Or does it? The Fed raised rates by 1.50% in the last 45 days and the 10-yr Note yield has declined from 3.49% to 2.75% in the same time frame. Why?

Fed rate hikes are intended to cool inflation, slow economic growth and slow down the labor market. If inflation cools, the economy slows, and the unemployment rate ticks up...long-term rates move lower.

Recession or No Recession

In his press conference, the Fed Chair was asked about whether our economy was in a recession and Mr. Powell said he didn't believe the US economy was in or near a recession. He cited the resiliency of the labor market as the reason why the economy was not in a recession. He did reiterate it was not the Fed's job to define a recession.

The classic definition of a recession is two consecutive quarters of negative growth. It will take a couple more months and revised reports before we see whether we have two back-to-back quarters of negative growth. In the same press conference, Powell did say the "slowdown in Q2 was notable".

Data Dependent

The Fed said that the size and scope of future rate hikes will be based on the incoming data. If inflation remains high, we could and should expect an "unusually" large rate hike especially if the labor market remains as strong as the Fed Chair noted.

Uncertainty and Volatility Ahead

There was nothing in the Fed Statement or Press Conference which should suggest higher home loan rates ahead. Watching how the Treasury Market is performing, its clear long-term rates do not see inflation as the long-term problem and the recent yield curve inversion in the 2-yr Note suggests we are in a recession, despite the Fed Chair saying otherwise.

Bottom line: Home loan rates have appeared to make their peak back in mid-June. With more housing inventory coming to market, now is a great time to capture the home of your dreams with prices and rates off the highest levels of late.

Last Week in Review: It's Fed Week

The quiet before the storm. This past week, Fed officials were literally "quiet" with no speeches ahead of next week's Fed Meeting where a .75% rate hike is widely expected. Let's discuss what will be an important week ahead.

Another Big Fed Rate Hike Coming

For the first time in over 40 years the Fed is expected to raise rates by at least .75% in back-to-back meetings.

This rate hike will have no direct impact on home loan rates, but it will increase short-term rates like credit cards, auto loans, and home equity lines of credit. Consumers should also expect a boost to the interest rate in your savings accounts.

How will mortgage rates react? That is the unknown at the moment. Back in June, when the Fed also raised rates by .75%, the 10-yr Note yield hit 3.49%, the highest levels in years, and moved sharply lower on increased recession fears. Today, the 10-yr Note stands near 3.00%. If the economy can absorb higher long-term rates, then we should expect long-term rates to move higher. Currently, the 2-yr-Note yield is near 3.25% and inverted with the 10-yr, which typically portends a recession.

In a recession, long-term rates do not go higher, and the Fed doesn't hike rates.

The Fed, who controls short-term rates, is hiking the Fed Funds Rate to slow demand, tamp down inflation, cool off the labor market and remove "froth" from the housing market.

Froth Removed

"Single-family starts are retreating on higher construction costs and interest rates, and this decline is reflected in our latest builder surveys, which show a steep drop in builder sentiment for the single-family market," Jerry Konter, chairman of the National Association of Home Builders (NAHB).

With the US economy close or in a recession, we should expect housing to slow, and it is. The single-family home market is also slowing in the existing home arena. The June Existing Home Sales report showed the slowest sales pace since June 2020, at the start of the Covid pandemic.

The median price of a home sold in June hit $416,000, another record and an increase of 13.4%. Price gains are expected to slow in the months ahead to a more normal rate of appreciation – this is a good thing.

The Unemployment Line is Getting Longer

Initial Jobs Claims, a leading indicator of the labor market, showed that 251,000 signed up for unemployment benefits. This is a low historic number, but the numbers have been increasing each of the last several weeks – highlighting layoffs across the country.

Currently, there are still 2 jobs available for every unemployed person that wants a job, so the labor market remains strong, which is great for housing as well as ensuring any recession would be shallow.

Let's hope the Fed stays true to their word and remains "nimble" in response to the incoming data which is showing signs of worsening.

Bottom line: Home loan rates appeared to have stabilized and more housing inventory has been coming to the market in many areas. With that said, if you are interested in purchasing a home, it remains a great time to find a home and capture rates well beneath the rate of inflation.