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Last Week in Review: Rates Spike on Tough Fed Talk

Home loan rates ticked up to fresh three-year highs as a parade of Federal Reserve officials spoke throughout last week about the need to hike rates more aggressively to combat inflation. Let's walk through what happened last week and talk about the big reports this week.
"There is an obvious need to move expeditiously to a more neutral level and more restrictive levels if needed to restore price stability," Fed Chair Jerome Powell – 3.21.22.
This quote, along with several others from Mr. Powell sent the bond prices lower and rates touching three-year highs. It suggested the Fed will need to hike the Fed Funds Rate quickly to get to a more neutral rate, where the Fed Funds Rate neither hurts nor helps the economy. Presently, the Fed Funds Rate is between .25% - .50%.
What would be a neutral rate? Atlanta Fed President Bostic, who was also speaking this week, said the neutral rate is 2.40%. So, this means the Fed wants to hike the Fed Funds Rate by 2.00% or 8 more .25% hikes to get to Bostic's neutral rate.
Mr. Powell also said they could move to more "restrictive levels," which would mean even more rate hikes and a Fed Funds Rate higher than 2.40%.
"Risk is rising. An extended period of high inflation could push longer-term expectations uncomfortably higher." Jerome Powell.
This quote speaks as to why long-term rates have risen so fast of late and why the Fed is speaking so tough this week. The major fear of the Fed is for long-term inflation expectations to rise – meaning, people will expect higher prices in the future. If people expect higher prices, we will see higher prices. This disruption to price stability is exactly what the Fed wants to fight.
Housing Already Seeing the Effect of Higher Rates
New Home Sales for February showed sales of newly built homes decline from a downwardly revised January number. Overall, New Home Sales are down 6.2% from February 2021.
NAHB Chief Economist Robert Dietz said, "New home sales softened in January and February as mortgage rates increased."
A new home sale occurs when a sales contract is signed, or a deposit is accepted. The home doesn't have to be built or even started to be considered a new home sale. Of the 407,000 new homes available for sale only 35,000 are built and ready to be occupied.
The median home price of a new home rose to $400,600, up 10.6% from February 2021, despite a sharp 20% increase in building materials over that time.
It's clear that housing has cooled a bit, which is exactly what the Fed wanted. What remains unclear is if, when, and how much the Fed could hike rates as an interest rate sensitive sector, like housing, has already slowed down.
Bottom line: The tough Fed talk hurt long-term rates like mortgages, last week. It remains to be seen if the Fed can act as tough as they talk. If you, a family member, or a friend is considering a mortgage, now is a great time as rates remain below the rate of inflation ... something that hasn't happened in nearly 50 years.

Last Week In Review: We Have Liftoff

Interest rates hover near three-year highs as the Federal Open Market Committee (FOMC) raised the Federal Funds Rate by 0.25%. This was the first rate hike in three years. Let's break down what the Fed said in their Statement and press conference and look at what the future may hold.
"The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2% objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting."...FOMC Statement March 16, 2022.
So, the Fed raised rates by .25% and said there will likely be more rate hikes to follow at some point in the future. Additionally, they expect to begin reducing its holding of agency mortgage-backed securities at a coming meeting. What does it all mean?
The Fed rate hike and subsequent rate hikes will have no direct effect on mortgage rates. Fed rate hikes only affect short-term loans like autos, credit cards, and home equity lines of credit.
If the economy is strong enough to absorb six more rate hikes this year, which is the current forecast, then we should expect long-term rates like mortgages and the 10-year Note yield to move higher.
Fed Chair Powell in his post statement press conference said multiple times, the economy is strong enough to absorb multiple rate hikes and there is no threat of a recession.
Time will tell whether the Fed will be able to raise rates that many times. Back in 2018, when Consumer Sentiment was at a 20-year high, the Fed raised rates four times and ended up cutting rates in 2019. Now in 2022, we are led to believe the Fed has the room to hike rates seven times, despite consumer sentiment hovering at 11-year lows and recessionary levels.
"We will take the necessary steps to ensure that high inflation does not become entrenched. We're fully committed to bring inflation back down. High inflation takes a toll on everybody" Fed Chair Jerome Powell.
Part of the "necessary steps" may be for the Fed to shrink their balance sheet and more specifically, remove their holding of mortgage-backed securities (MBS). Currently, the Fed has about $2.7T worth of MBS on its balance sheet.
Here's how the Fed explained it to us back in January and how they intended to reduce their MBS holdings.
"The Committee intends to reduce the Federal Reserve's securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA)."
This means when mortgages are paid off through maturation, moving, or refinance – the Fed will no longer use those proceeds to purchase more MBS. This is important because if the economy is strong enough for the Fed to do this, then we should expect mortgage rates to increase over time as the Fed goes from being a buyer of mortgages to a seller of mortgages.
What is the bond market saying?
If you look at the spread between the 2 and 10-year Note yields ... it is just 20bp. The last time it was this narrow, the Fed was CUTTING rates six months later. History has shown that almost every time the 2-year yield inverts or moves higher than the 10-year yield, it precedes an economic recession.
The good news? The Fed knows this and is watching the market's reaction very closely as they did back in 2018. Fed Chair Powell also said numerous times they will take action carefully to avoid pushing the economy into a recession. The rest of this year will be volatile as the bond market reacts to economic reports and how it will influence Fed rate hikes and the potential balance sheet reduction activity.
Bottom line: Fed Rate hikes have no direct impact on mortgage rates. So, despite the Fed raising rates by .25%, home loan rates remain stable for now. If you, a family member, or a friend is considering a mortgage, now is a great time as rates remain just beneath the 2022 peaks.

“Maria is a true non-QM specialist,” says Jeff Massotti, Director, Regional Sales, Wholesale for CMS. “She knows how to custom fit her clients into the best programs for their borrowers. Her attention and knowledge to the guidelines, and ability to maneuver within the non-QM suite of products, speaks to her daily effectiveness and success. She is a true asset to not only the Wholesale East Region, but really for all of CMS.”
Maria Bekris-Selky got her start in the mortgage business 20 years ago. Coupled with her attention to detail, Maria’s vast experience is a big part of what makes her so adept at being able to expertly find the right product fit for her clients, and one of the main reasons she is identified as a non-QM Super Star.
“I provide a service of helping my brokers close tough loans,” she says. Maria considers it the most important thing she does for Carrington and our customers. “I provide the keys to getting deals done, and assist in getting their deals closed. Non-QM being my specialty, I love my brokers!” Maria’s love and commitment to her brokers showed once again in 2021 when she was recognized as a Peak Performer for the 4th straight year, highlighted with being the #1 non-QM unit and volume producer in Wholesale for 2021.
Over the years, Maria has learned that the best way to show her brokers that love is to let them know she has just as much at stake as they do. “Each loan is important because there are many people and moving parts trusting me with the most important transaction of their life,” she says. “My brokers know when I say I’m on it, I am 100 percent on it and won’t stop until I get that loan closed! Brokers trust me. So if I say: ‘Yes, we can do that,’ I will. And if I can’t, I will get that message over as quickly as possible. My word and reputation is everything.”
To stay motivated, Maria tries to remember that the work she puts in at the beginning of the month will show in her funding’s 60 days into her pipeline. Having that long view helps her remain vigilant and on top of her game. As for the best strategy she can share with Associates to maintain a customer-centric focus? She says the following is what separates her from the competition: “Stay focused; keep in front of brokers; and return emails within minutes.”

Last Week in Review: Rates Edge Higher as Inflation Expectations Rise

Interest rates ticked up this week, despite the ongoing and uncertain Russia/Ukraine war. Let's break down what happened this past week as we prepare for an important Fed meeting.
This is probably a good week to remind everyone that inflation is an economic killer. When inflation fears rise both stocks and bonds perform poorly with rates rising.
Last Tuesday, President Biden sanctioned Russian energy including coal, natural gas, and oil. On the latter, this measure caused oil to touch nearly $130 a barrel. This increase has led to gas at the pumps hitting a historic high of $4.25. Oil and gas at these levels are highly inflationary in the absence of a material and sustained decline.
If this was not enough, commodity prices are soaring in response to the uncertainty. Wheat, lumber, copper, nickel...you name it and it's trading sharply higher, leading to higher costs on goods through the supply chain and down to the customer.
An important metric to track is the 10-year break-even rate, which essentially is what the US bond market expects inflation to average over the next 10 years. That number has climbed sharply over the past week and is the main reason why the 10-yr note yield and mortgage rates increased this week.
How do we lower and fight inflation? The Fed's mandate is to "maintain price stability "or inflation, so the financial markets will look to what they say at next week's Fed meeting. 
The Federal Reserve is in a tough spot.
The Fed Chair recently said they are going to hike rates several times this year and more next year. It sounded like a reasonable plan a few months ago, but our economy has since been punched in the mouth with Omicron, continued supply chain issues, labor shortages, and fast declining consumer sentiment.
Moreover, and most importantly, a Fed rate hike is intended to draw money out of the economy to restore the balance between supply and demand. Right now, the sharp rise in oil is accomplishing the same goal as Americans continue to spend more money on gas to fill their car and heat their homes. This added cost to consumers is already draining savings, lowering sentiment, and coming at the expense of other purchases.
Oh, wait...now factor in the Ukraine/Russia war. This has elevated prices further. Wheat is a major product supplied by Russia and Ukraine...those prices are soaring and may stay quite elevated for some time, thereby slowing consumer spending on other items.
Consumer spending makes up two-thirds of our economic growth or GDP. If energy, food, and commodity prices remain elevated, we should expect GDP to stall.
As you can see, consumer demand is already fragile and slow. Fed Rate hikes will only slow the economy further.
Lastly, look at the 2/10 year note yield spread. It is narrowing every day and down to the smallest margin since 2018 which could signal an economic slowdown. Back at that time the Fed hiked rates too much and ended up cutting rates in 2019.
Here we are in 2022, and the Fed "says" they are going to hike rates several times with a similar-looking 2-year vs.10 yield spread as 2018. Time will tell if, how much, and when they can hike.
Bottom line: Fed Rate hikes have no direct impact on mortgage rates. So, when the Fed hikes rates next week, it will not have a .25% hike to Mortgage rates. If you, a family member, or a friend is considering a mortgage, now is a great time as rates remain just beneath the 2022 peaks.