Last Week In Review: The Fed Spoke and Bonds Didn't Listen
This past week the Federal Reserve issued their monetary policy statement, as well as new forecasts on the economy, inflation, and rates. Despite all the soft talk on inflation and seeming lack of concern on higher prices ahead, the bond market was not buying it. Let's break down what happened.
Fed meetings are always market movers, but this particular one seemed to carry even more weight. The Fed has lost control of long-term rates, as they have ticked higher since January 6, despite the Fed trying to "talk down" inflation on numerous occasions and purchasing $120B worth of bonds per month.
It's All About Inflation
Mortgage-backed securities (MBS) are the instruments which determine home loan pricing, and inflation is the main driver. If inflation moves higher, rates must move higher. Currently, inflation is not an issue. It is running at 1.7% year-over-year.
The problem? We are going to see much higher inflation over the next few months as year-over-year figures will explode due to the sharp spike in commodities, oil, lumber, and such since last spring.
In the Fed statement and press conference, the Fed continues to acknowledge that inflation will be volatile in the near-term but will moderate back towards a longer-term 2% run rate by next year.
So far, the bond market is not listening or believing the Fed's outlook on inflation, and after further digestion of their words, bond prices plunged on Thursday, causing rates to touch the highest levels in over a year.
Three Things Bonds Didn't Like:
Once again, bonds hate inflation, and there were three things from the Fed meeting which spooked bonds and caused the spike higher in rates:
Bottom line: Rates have resumed their trend higher. As economies reopen, we should expect rates to continue to increase further over time.
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