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Last Week in Review: Inflation, Fed, Uncertainty - Oh My

Interest rates ticked up to the highest level in over two years in response to another increase in consumer prices. Let's discuss what happened and what to watch for next week.
40-Year High Consumer Inflation
Last Thursday, the Bureau of Labor Statistics (BLS) reported the Consumer Price Index (CPI) came in at a scorching 7.5% year over year. You name it, everything has gone up in price. Enormous year-on-year increases in food, energy, and housing are inflicting consumers with economic "pain".
When you strip out food and energy costs, which are more volatile, consumer prices are still rising 6% year over year; more than double the Fed's tolerance level.
The big disappointment was the 0.6% increase in prices month over month, as this shows inflation is not showing signs of moderation and the high levels are certainly not "transitory".
Inflation is an economic killer. It is a tax that does not get collected and if people believe prices will be higher in the future, inflation could become entrenched.
The good news, if there is any? Inflation Expectations for the future remain relatively low. The 10-Yr Treasury Breakeven rate, or what the bond market expects inflation to run on average over the next 10 years is a relatively low 2.42%.
The Fed Mandate
The Federal Reserve has mandates to maintain price stability – inflation. How does the Fed fight inflation, this king of pain? By tightening monetary policy through rate hikes and balance sheet reduction, in hopes to slow demand and ease pricing pressures.
At the last Fed Meeting, Chair Jerome Powell, said they would hike rates in March "assuming" the economic data comes in as expected. Inflation is worse than expected, so we should fully expect a rate hike. Shortly after the CPI, the markets priced the probability of a 50-basis point rate hike at .50%. It is important to note that the Fed is going to hike the Fed Funds Rate, which has no direct impact on home loan rates. It will have an immediate effect on short-term loans like auto, credit card, and home equity lines of credit.
Uncertainty and 2018 Revisited
The financial markets are on edge as it is not clear how many times the Fed will hike rates and how many the economy can absorb before materially slowing down. This will be the balancing act the Fed will have to deal with in the weeks and months ahead. The incoming data will determine if and how many times the Fed will hike rates, meaning we will be dealing with continued uncertainty and volatility.
If the Fed can hike rates a couple of times and the economy and financial markets can absorb them, then we should also expect slightly higher mortgage rates as the year progresses...exactly what happened in 2018.
Also, back in 2018, the Fed "overcooked" the rate hikes, hiking a fourth time in December 2018. The result? Long-term rates slid sharply lower as the extra rate hikes slowed economic activity. The Fed ended up spending 2019 easing back and cutting rates. There is a fear in the stock market that the Fed will repeat the same moves.
Bottom line: The current environment remains like 2018, where rates creep higher over time in response to a hawkish Fed and the threat of multiple rate hikes. If you are considering a mortgage, rates are still suppressed thanks to the Fed bond-buying program which will end in March. Don't delay.

Last Week in Review: Three Things Moving the Markets

The financial markets began February exactly where January left off - trading in a volatile fashion. After all the bouncing around, interest rates ticked higher week over week. Let's discuss what happened and what to watch for next week.
1.) Omicron's Economic Impact Being Felt
"The path of the economy will depend significantly on the course of the virus" - FOMC Monetary Policy Statement, Dec 2021.
As Omicron ripped through the United States over the past month or so, we are just starting to see the economic impact. The labor readings for January showed negative to no growth in job creation ... why? Omicron was responsible for several million people being out of work at any given time and delayed hiring plans.
We should also expect February jobs data, due out in early March, to be weak. These back-to-back poor readings come right before the next Fed meeting on March 16th.
Remember, the Fed has a dual mandate, which is to maintain price stability and promote maximum employment. With labor market weakness and the associated decline in consumer sentiment that comes with it, can the Fed still hike rates in March, as widely expected?
We are reminded of this quote from Fed Chair Jerome Powell's recent press conference.
"The committee is of a mind to raise the federal funds rate at the March meeting 'ASSUMING' that the conditions are appropriate for doing so."
The large uncertainty surrounding the economic data being reported and how the Federal Reserve will respond, which could be rate hikes and balance sheet reduction is the major cause for high volatility in bonds, rates, and stocks.
2.) Mixed Europe Central Bank Activity
"We have not raised rates today because the economy is roaring away, we face the risk that some of the higher imported inflation could become entrained within the domestic economy, leading to a longer period of high inflation." Bank of England Governor Andrew Bailey.
Another uncertainty causing volatility in the financial markets is the messaging and actions being taken by Central Banks around the globe. The Bank of England just hiked rates at two consecutive meetings, while China just cut rates and injected more liquidity to help with their economic slowdown.
Meanwhile, in the European Union and European Central Bank President Christine Lagarde maintains the ECB will not hike rates in 2022 – despite record-high inflation. This dovish stance on inflation and monetary policy helped the German 10-year Bund yield spike to .12% the highest level in three years. As interest rates move higher around the globe, it pulls our interest rates higher as well. On Thursday, the 10-yr yield started the day near 1.75% and quickly shot to 1.85% in response to the central bank activity around the globe.
3.) Tech Wreck
Disappointing earnings from Meta/Facebook put into question the ability for these once high-fliers to continue growing. On top of the bad earnings, growth stocks detest higher rates, so when the 10-year yield reached 1.85% last Thursday, it added to the selling pressure in stocks.
This trading action is a reminder that if stocks go down, rates don't always follow suit. In this current environment, it is quite the contrary; stocks are worried the Fed may overcook rate hikes and create an economic slowdown. Any small uptick in rates has seen NASDAQ tech shares move lower. Expect this trend to continue amidst the uncertainty surrounding what the economy is doing and how the Fed will respond.
Bottom line: The current environment remains like 2018, where rates creep higher over time in response to a hawkish Fed and the threat of multiple rate hikes. If you are considering a mortgage, rates are still suppressed thanks to the Fed bond-buying program which will end in March. Don't delay.

This past week, the FOMC released their Monetary Policy Statement, and Chair Jerome Powell hosted a press conference to discuss the economic outlook and the path of interest rates. Let's discuss what was said, how the markets reacted, and what the future may hold.

Fed Taking Away the Punchbowl
"In light of the remarkable progress we've seen in the labor market and inflation that is well-above our 2% long-run goal, the economy no longer needs sustained high levels of monetary policy support," Jerome Powell – Press Conference January 26, 2022.
This quote, by Jerome Powell, says it all. The current Federal Reserve is much like the one we saw back in 2018. At that time, the Fed hiked rates multiple times and trimmed their balance sheet. Back in 2018, the Fed also hiked too many times causing the financial markets to decline sharply. The Fed then spent the rest of 2019 reversing its position by halting the balance sheet runoff and cutting rates in June 2019.
"The committee is of a mind to raise the federal funds rate at the March meeting 'ASSUMING' that the conditions are appropriate for doing so".
The "assuming" part leaves the door open for the Fed to do nothing should economic data disappoint over the coming weeks. It is clear the Fed wants to hike rates, but it is not clear whether the Fed will be able to be as aggressive in doing so. The uncertainty that comes with this will lead to a lot of market volatility in stocks, bonds, and rates.
"In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy." FOMC Statement, January 26, 2022.
This is probably the most important takeaway for the housing sector. Here is what it means…once the Fed stops buying bonds and starts hiking rates, they have a desire to trim or shrink their balance sheet. In doing so, they only want to hold Treasuries. This means they will no longer reinvest in mortgage-backed securities (MBS) and could become actual sellers of MBS in the future.
Last Wednesday, MBS reacted very poorly to the idea of the Fed selling bonds. If the Fed were to do this, we should expect higher home loan rates. Fed Chair Powell also shared the Fed will discuss what balance sheet reduction might look like over the next couple of Fed Meetings.
"Inflation risks are still to the upside in the views of most FOMC participants, and certainly in my view as well. There's a risk that the high inflation we are seeing will be prolonged. There's a risk that it will move even higher. So, we don't think that's the base case, but you asked what the risks are, and we have to be in a position with our monetary policy to address all of the plausible outcomes," J. Powell.
The direction of the Fed will be determined by the incoming data. The financial markets have priced in three rate hikes, with the first coming in March. Should inflation moderate over the coming months, the Fed may not hike rates three or more times. But, if inflation does go higher or remains high, the Fed might very well be forced to hike rates further. This will make for an uncertain and volatile year for the financial markets in 2022.
Bottom line: The sentiment in the financial markets has shifted very quickly. The Fed went from a tailwind to a headwind as it relates to rates. Market volatility will be high. If you are considering a mortgage, rates are still suppressed thanks to the Fed bond-buying program which will end in March. Don't delay.

Last Week in Review: Rates are Fed Up

Home loan rates ticked up to the highest levels in two years. Let's discuss what's happened this past week and what to watch in the weeks ahead.
Interest Rates Rising Globally
The U.S. bond market took the long weekend to ponder Federal Reserve Monetary Policy and what they will do at next week's Fed meeting and beyond.
Once the bond market reopened on Tuesday, it came to the realization that rates "can only go up from here."
Much like 2018, the Fed is hawkish and they want to raise rates multiple times and possibly "shrink" their balance sheet (sell bonds).
The Treasury market saw the 2-year note yield, an instrument that responds to the notion of Fed rate hikes, spike above 1.00% for the first time in two years. The 10-year yield, which many look to as a rate that ebbs and flows with mortgage rates, ticked up above 1.85%, also the highest in two years.
Mortgage-backed securities (MBS), where home loan rates are derived, dropped sharply again, pushing rates to the highest mark in two years.
The spike here caused ripples abroad, where the German 10-year bund yield crept up to 0.0% for the first time in years. Germany and most of Europe have had negative rates for years and 2022 may be the year that changes.
Oil Prices Spiking
Just when you thought it was safe to fill up your tank, oil has gushed to $86 ... a seven-year high. This spike is untimely as we are already dealing with 7% consumer inflation and a market fearing multiple Fed rate hikes to fight inflation. In the absence of oil prices receding, it will lead to more inflation and expectations of even more. On the latter, this is the fear of the Fed, that consumers will get comfortable and expect higher prices in the future. Inflation expectations are self-fulfilling, meaning if we expect higher prices, we get them. The opposite is true.
It's All About the Fed, Folks
There is no lack of opinions on what the Fed will do this year as it relates to interest rates and their balance sheet. And it is this uncertainty that has caused incredible volatility in the stock and bond markets. The markets are fearing the Fed will hike rates four times or more this year.
Back in 2018, the Fed hiked rates four times and ultimately stocks declined sharply and housing was disrupted. Subsequently, the Fed spent 2019 reversing all the hawkishness and cut rates in July 2019.
Listening to the Fed is very important as the financial markets and housing are tethered to interest rates, which they control ... to some degree. Let's see what they say and do next week.
Bottom line: The sentiment in the financial markets has shifted very quickly. The Fed went from a tailwind to a headwind as it relates to rates. If you are considering a mortgage, rates are still suppressed thanks to the Fed bond-buying program which will end in March. Don't delay.

Last Week in Review: Omicron Hits the Financial Markets

The financial markets entered the 2021 Holiday season in a volatile fashion in response to Omicron, Build Back Better fallout, and the threat of Fed rate hikes in the coming year. Let's discuss what's happening and look at what to expect in the final week of the year.
Fallout from Rapid Omicron Variant Spread
This past week Omicron surprised the financial markets by exploding across the US. Despite the uncertainty, stocks attempted to stabilize and shrug off last week's losses at the expense of bonds.
The financial markets are looking beyond the rapid rise in cases as it appears, for now, most cases are somewhat mild. The markets will continue to watch the response for more restrictions, mandates, and potential shutdowns that will impact economic activity.
"As we look through these cases, literally ripping through the country right now – putting aside the rest of the world, I think we're finding ourselves where we knew we were going to get to for the past several months and that is that this virus will not be eradicated and we're going to have to learn to live with it". NBA Commissioner, Adam Silver.
This quote from NBA Commissioner Adam Silver about why the NBA is not likely to postpone the basketball season sums up what the financial markets are sensing.
Build Back Better off the Table, for Now
President Biden's Build Back Better (BBB) bill is no longer being debated as Sen. Joe Manchin said he is a "no" and will not vote for the legislature. We shall see what happens in 2022 and if a leaner bill comes to pass. If BBB doesn't pass or is watered down, it does help interest rates in three ways:

1. Less bond issuance: The Treasury will not be tasked to issue new bonds to help pay for the plan.
2. Less inflationary fears.
3. Less economic stimulus.

Some big financial institutions are already out saying that if BBB doesn't pass, our Gross Domestic Product (GDP) will come in .50% lower. With that said, any further economic slowdown will remove the likelihood of three Fed rate hikes in 2022.
Bottom line: The rise of Omicron has introduced uncertainty, which may soon pass. If you have clients considering a purchase or refinance, now is the time to secure a home loan before we return to pre-pandemic mortgage rates.

Last Week in Review: Fed Meeting Highlights and Market Reaction
It was Fed week. The highly anticipated Federal Reserve meeting took place last Wednesday, where they issued the FOMC monetary policy statement and Fed Chair Powell held a press conference. Let's break down what happened, the market's reaction, and what to look for in the weeks ahead.

The Federal Reserve is Speeding up the Taper
"In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities." Fed Monetary Policy Statement, Dec 15, 2021.
This is the long way of saying that the recent spike in inflation is forcing the Fed to end its bond-buying program by mid-March 2022. With consumer prices increasing by nearly 7% year over year, the Fed wants to remove this accommodative bond-buying program and pave the way for Fed rate hikes.
How many rate hikes? The Fed shared their "dot plot" which highlights the voting Federal Open Market Committee (FOMC) members forecast on rate hikes and it showed the Fed feels there will be three rate hikes in 2022, three more in 2023, and one more in 2024.
In response to the taper and rate hike forecast, long-term rates held steady and didn't increase ... why? The bond market may be questioning whether the Fed can increase rates that many times and if it does, it would likely slow down the economy. Bonds love bad news and if the economy slowed down, that would be a reason for lower rates.
Remember, when and if the Fed hikes rates, it will have no direct impact on mortgage rates. Rate hikes affect short-term loans like credit cards, autos, and home equity lines of credit.
The Jerome Powell Presser
Shortly after the Fed statement was released, Fed Chair Jerome Powell held a press conference and it was here, where he made the markets feel good about the action they are taking. Here are some key quotes and their impact:
"FOMC rate predictions don't represent a plan". Even though the "dot plot" or Fed rate forecast showed three hikes coming in each of the next two years, Powell reminded the world that any rate hikes would be based on incoming data.
"Nobody knows where the economy will be a year from now". This line soothed the markets that the Fed will not hike rates for the sake of hiking rates, and it will take time and data to determine if and, when it would be appropriate to hike rates.
"Labor Force Participation Rate (LFPR) subdued is disappointing". Part of the Fed's dual mandate is to promote maximum employment. In the absence of seeing a meaningful improvement where more people reenter the labor force and are working, the Fed may be pressured to hold off hiking rates.
"The path of the economy continues to depend on the course of the virus". With cases rising in some areas and mandates/restrictions being instituted in others, there is a sense that the Fed may have to be patient on rate hikes as we still deal with economic activity being impacted by the virus.
Lastly, the Fed Chair took a question about hiking rates with long-term yields and touched on a reason we may see long-term rates relatively low for a longer time. Why? Low global yields. Both Japanese and German 10-year bonds have negative yields with the latter yielding -0.35%. For global investors searching for yield, our 10-year Note yielding 1.45% looks frothy compared to other options so we should expect investors to continue to buy our Treasuries. Thereby keeping our long-term rates relatively low.
Bottom line: The Fed just completely shifted its position from dovish to hawkish. The speeding up of the taper and growing likelihood of rate hikes, means we are likely to experience more volatility in the weeks and months ahead. If you have clients considering a purchase or refinance, now is the time to secure a home loan before we return to pre-pandemic mortgage rates.

This past week, mortgage-backed securities (MBSs) moved lower and are trading near 2021 price lows, pushing mortgage rates up near the worst levels of the year. Let's talk about three things moving the markets and what to look for in the weeks ahead.

1. Omicron Safe Haven Trade Unwinds
The financial markets had panicked in response to the initial Omicron news on fears of rising hospitalizations, deaths, and more shutdowns/restrictions. Stocks fell sharply and bond yields improved, with the 10-yr Note touching 1.34%.
We are awaiting more data, but the initial feedback suggests those who are affected by the Omicron variant are not requiring medical attention or hospitalization. We also learned that Pfizer's vaccine may also help keep symptoms mild.
In response to this good news, stocks soared higher, erasing all the previous week's losses and bond yield ticked higher with the 10-yr moving back up to 1.50%.
In addition to looking past Omicron, it appears the financial markets may be looking past COVID on the realization we will continue to see new variants that may produce mild symptoms and not require us to shut down parts of the economy.
2. Quiet Before the Storm
It was a "quiet" week, literally on the Fed front, as no Federal Reserve officials spoke this week in what is the "quiet period" before Wednesday's Fed Statement release.
Come Wednesday at 2 pm ET, things will be far from quiet. When the Federal Reserve delivers its Monetary Policy Statement, we will hear the Fed's outlook on inflation, the labor market, and the economy.
Most importantly, we will hear whether the Fed will speed up the "tapering" of bond purchases, meaning will they buy even less every month.
Recently renominated Fed Chair Powell was on Capitol Hill and spoke far more hawkishly, where he said it's probably time to speed up the tapering, so we expect that announcement next week. This move would pave the way for the pandemic-induced bond-buying program to likely end sometime in Spring 2022, rather than June 2022.
This is an important move by the Fed because it also paves the way for a potential rate hike earlier in 2022. The recent hawkish tone by the Fed was another big reason for stocks to sell-off recently. We shall soon see what the Fed says and does this week and how the financial markets react.
It is worth reminding here that Fed rate hikes do not affect mortgage rates. Once the Fed does hike rates, it impacts short-term rates like credit cards, auto loans, and home equity lines of credit.
3. Mixed Labor Market Picture
"Promoting maximum employment" is part of the Fed's dual mandate. The labor market has been giving us mixed signals of late. Our unemployment rate has fallen to 4.2% which is the lowest since the pandemic began, but our Labor Force Participation Rate (LFPR) remains stubbornly low and at levels last seen in the 1970s.
The LFPR is an important figure as it tells us how many people over the age of 16 and not in the military are either working or actively looking for a job.
The Fed recently said they want to see "maximum participation" before hiking rates. At the moment, we are not seeing any meaningful improvement in LFPR, so it will be interesting to see what the Fed says next week and if they touch on "participation".
The unemployment line is certainly short...Initial Jobless Claims, people who first file for unemployment, came in at 185K. This is a low number and highlights how easy it is to get a job.
How easy is it? We have 6.5M people unemployed and over 11M jobs available. Anyone looking for a job can easily find one and likely command higher pays, hence the reason we are seeing a record amount of job quitters.
Bottom line: The improving labor market will continue to support housing into 2022 and beyond. At the same time, rates are ticking up as the Fed threatens to buy fewer bonds. Now is a wonderful time to lock in a home loan before we see pre-pandemic rates.

Last Week in Review: Fed Surprise Flip Flop

This past week, we watched mortgage-backed securities (MBSs) bounce higher off 2021 price lows, helping home loan rates modestly improve from their worst levels of the year. Let's talk about three things moving the markets and what to look for in the weeks ahead.
1. Fed Chair Throws Towel in On Inflation
I think it's probably a good time to retire that word (transitory) and try to explain more clearly what we mean," Fed Chair Powell 11/30/21.
On Tuesday, Fed Chair Jerome Powell and Treasury Secretary Janet Yellen, were on Capitol Hill providing the Senate and House their semi-annual testimony on the state of the economy and monetary policy.
In this setting, politicians push with tough questions, and it was here where Fed Chair Powell "folded" and seemed to have completely flip-flopped on the outlook for inflation. For months, Mr. Powell was steadfast saying that the increases in prices were "transitory" or short-lived in nature and that supply chain bottlenecks would likely be relieved sometime mid-2022.
This "retiring" of transitory is a big change for the Fed and it means a few things. One, the Fed has finally acknowledged that the increase in prices we are seeing is not going to be temporary and cool down in mid-2022. It also means the Fed must change its position as it relates to inflation because its mandate is to maintain price stability.
The surprising inflation outlook change and hawkish tone shook the financial markets, with stocks dropping to the benefit of bonds/rates.
2. When the Fed Becomes Hawkish
"At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner" – Fed Chair Jerome Powell – 11/30/21.
In another surprise move, one week after being renominated, Fed Chair Powell told the world that at the December Fed meeting, they may likely announce quickening the pace of the bond taper to end sometime in the Spring of 2022.
The main reason for this new hawkish tone and to speed up the taper is to make way for a Fed Rate Hike, which the markets expect to happen by July 2022.
It's probably a good time to remember that Fed rate hikes have no direct impact on home loan rates. Fed rate hikes impact short-term rates like auto loans, credit cards, and home equity lines of credit. However, if you look at why the Fed is hiking rates, it is to help lower inflation and cool off economic growth. Both of those help long-term bonds like mortgage-backed securities.
The hawkish Fed action of stopping bond-buying and hiking rates, also strengthens the US Dollar versus other currencies, thereby lowering import prices and commodity prices like oil, etc. All of which are disinflationary and helpful to long-term rates.
3. Omicron Uncertainty
A new Covid variant, Omicron, emerged with its first case in the US. Initially, the stock market tanked, and interest rates improved on the rumors, chaos, and uncertainty surrounding the new variant.
It will take a couple of weeks before we have more data and insights, but at first glance, it appears the cases are mild, which if proven true, would be very good news as we head into winter. Remember stocks like good news, bonds/rates hate good news.
In the weeks ahead, we will also have to see the response by the Federal government and States. More restrictions and mandates create uncertainty and negatively impact economic activity, all of which hurt stocks and help rates.
Bottom line: The Fed just completely shifted its position from dovish to hawkish. The speeding up of the taper and growing likelihood of rate hikes, means we are likely to experience more volatility in the weeks and months ahead. If you have clients considering a purchase or refinance, now is the time to secure a home loan before we return to pre-pandemic mortgage rates.

This past week, we watched mortgage-backed securities (MBSs) make 2021 price lows, which means the highest home loan rates in 2021. Let's talk about three things moving the markets and what to look for in the week ahead.

1. Consumer Sentiment Remains Near a Decade Low
The Michigan Consumer Sentiment for October was reported at 67.4, hovering near a decade low. The reason? Inflation. Even though we are seeing the highest hourly wage gains in decades, they are being completely outpaced by the rise in prices, which means we are currently seeing negative wage growth, where wages do not keep up with price growth.
This is not a good thing in the longer term. If inflation does not moderate as the Fed had been expecting, this will put pressure on the consumer. If the consumer slows spending due to lack of purchasing power, our Gross Domestic Product (GDP) will decline, as consumer spending makes up two-thirds of our economic growth. We do not want to see consumer spending stall or stop, or we will be seeing bits of stagflation – high inflation and slow growth.
For now, the consumer remains resilient with the ability and willingness to spend. What happens next from a policy response (WH Administration and Federal Reserve) will be very important in 2022. The wrong move at the wrong time could have lingering effects on our economy.
2. MBS Make Fresh 2021 Price Lows
It is important to know that MBSs determine home loan rates, not the 10-yr Note. So even though the 10-yr yield, at 1.67%, has not made a new 2021 high yet, home loan rates hit their highest levels of 2021.
If MBS prices fall much beneath current levels, we are likely to see prices fall further and rates heading higher towards pre-pandemic levels.
This should not be a surprise as the Fed, which we mention above, helped the economy with its pandemic-induced bond-buying program. That bond-buying program is now being tapered and it is scheduled to end in the middle of 2022. Less bond-buying should lead to a gradual increase in home loan rates over time. If you add on the persistently high inflation, one could argue that rates should probably already be higher than present levels.
3. Fed Chair Powell Renominated
President Biden announced he was going to renominate current Fed Chair Jerome Powell to another 4-yr team. He cited his experience and steady hand through the depths of the pandemic. As it relates to housing and mortgage, the Federal Reserve was a savior.
Back in March of 2020, the Fed immediately started a bond-buying program to help stabilize the disrupted MBS market and to pin down long-term mortgage rates. It worked. The Fed's action created a boom of refinancing and purchase activity which helped grow the economy at a time when many industries were shut down or struggling.
In response to the nomination, the financial markets started pricing in Fed rate hikes as Jerome Powell is less dovish or tolerant of inflation than the other person up for nomination, Lael Brainard.
Stocks were under selling pressure all week in response to the spike in rates, threat of inflation, and increased likelihood of rate hikes.
It remains to be seen when and if the Fed will be able to hike rates sometime in 2022. We have already heard from countries abroad, like the European Union, who recently said they are not likely to hike rates until 2024...citing another wave of Covid and restrictions that will disrupt economic activity.
Bottom line: The Fed is tapering, and inflation is running high, well north of mortgage rates. This is unsustainable over the long term. Either inflation comes down, rates go up, or a bit of both. This means if you are considering a mortgage, take advantage of pandemic-induced rates, while they exist.

This past week, we watched mortgage-backed securities (MBSs), drift down near the lowest prices of 2021, which means the highest home loan rates in 2021. Let's talk about three things moving the markets and what to look for in the week ahead.

1. Let the Taper Begin
The Fed officially started tapering or scaling back their bond purchases this week. On average, the Fed will be buying about $4.8B per day over the next month, down from $5.3B.
The plan is to "taper" by $5B per month every month and remove the additional $40B in MBS purchases every month. Note, even when the Fed is done tapering, they will still be buying MBSs daily as billions of dollars are reinvested from the principal being returned on refinancing and purchase activity.
With all things equal, once the Fed removes this pandemic-induced MBS buying, it is reasonable to think home loan rates should drift higher towards pre-pandemic levels as well.
Over the next few months, as the Fed tapers, the outlook for inflation, employment, and what the Fed does next with rates will also have a role in the next directional move in rates.
2. Benefits of a Strong Buck
The bond market has been showing amazing resilience despite the Fed taper and hot inflation. One reason is the strong U.S. dollar. The buck has been rallying for weeks as our country outperforms those around the world and our yields are "juicy" when compared to negative yields around the globe. Additionally, the Fed tapering and threat of a rate hike in the summer of 2022 is also helping the greenback strengthen.
The benefits of a strong U.S. dollar are as follows:

• It makes our imports less expensive or disinflationary. It helps keep commodity and oil prices (those priced in dollars) in check and it makes our debt/bonds more attractive to global investors.
• With the Dollar at a 16-month high, it is now touching a resistance level, which could pause or even push the dollar lower. The Build Back Better Framework, which is being debated in D.C., could also influence the dollar. More spending could lead to dollar weakness, no more or little spending could lead to dollar strength.
• If the greenback continues higher, it is good for bond/rates, inflation, and Fed policy (maybe hold off on rate hikes). The opposite is true.

3. Consumers Paying More, for Now
Inflation expectations are simply the rate at which consumers, businesses, and investors expect prices to rise in the future. This means inflation is self-fulfilling, if people believe or "expect" higher prices, prices will go higher.
This past week we saw a very strong Retail Sales number, which highlighted that the consumer has an ability and willingness to spend. Consumer spending makes up two-thirds of U.S. economic growth, so it is important the consumer doesn't retreat.
What can hurt the consumer? Inflation and the decline in purchasing power. That is starting to rear its ugly head. Retail Sales and other reports of late like the Empire Manufacturing Index showed the "prices paid" by consumers and producers are soaring. Sometime in 2022, we will see if the inflation is transitory and recedes, or it increases. If the latter takes place, consumer demand may be challenged, which could lead to slower economic growth.
Bottom line: The Fed is tapering, and inflation is running high, well north of mortgage rates. This is unsustainable over the long term. Either inflation comes down, rates go up, or a bit of both.