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Rates Edge Higher as Inflation Expectations Rise

March 14, 2022jordanreedNews

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.

Big News Sparks Big Moves

March 4, 2022jordanreedNews

Last Week in Review: Big News Sparks Big Moves

Interest rates retreated from 2019 peaks as the Ukraine invasion by Russia escalates and grows more uncertain. However, there were other big developments here at home that erased a good portion of the rate improvement. Let’s break down what happened and what to look for in the week ahead.

1.) Ukraine Invasion Market Reaction

The Ukraine/Russian war has escalated, and the outcome remains highly uncertain. No one knows if, when, and how this will end. When the world experiences tense geopolitical moments, it drives what is called a “safe-haven” trade into the relative safety of the US Dollar and the US-denominated assets like Treasuries and mortgage-backed securities (MBS).

Last Monday and Tuesday interest rates moved sharply lower, with the 10-yr Note declining from 2.00% to touching 1.69%. MBSs also improved nicely but the gains were not in lockstep with the ultra-safe haven of the Treasury market. Meaning, when the world is highly uncertain, Treasury rates improve faster and further than home loan rates.

The longer this war continues the longer we should expect rates to remain near or lower than current levels as the situation puts a bid or support under the bond market.

2.) Fed Chair Powell Testifies Before Congress

Last Wednesday was bad for bonds/rates which gave up half a sizable portion of their multi-day rate improvements. The main catalyst was Fed Chair Powell, who provided his semi-annual testimony before Congress.

“Reducing our balance sheet will commence after the process of raising interest rates has begun and will proceed in a predictable manner primarily through adjustments to reinvestments.” Fed Chair Jerome Powell prepared testimony on 3/2/22.

This line reiterates the Fed’s desire to remove MBSs from their balance sheet. The Fed currently has $2.7T of MBSs on its books. If the economy remains strong and can absorb multiple Fed rate hikes, then the Fed will try to become a seller of MBSs. The MBS market didn’t like these words despite all the uncertainty in Ukraine and home loan rates shot higher in response.

“The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain. Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”

Here, the Fed is telling us the uncertainty in Ukraine could lead to fewer rate hikes. Stocks liked it and soared higher, at the expense of bonds and rates.

Lastly, the Fed essentially told Congress that it expects a .25% hike in a couple of weeks. This removed the uncertainty that the Fed may go with a .50% hike. Stocks liked this and bonds did not.

3.) Soaring Oil Prices

Oil touched $116 a barrel last Thursday. If there was ever a time to have high prices “transitory”, let’s all hope this dramatic increase in oil prices proves to be short-lived. High energy prices are an economic killer. It is already weighing on consumer sentiment, and should it continue, it will weigh on consumer spending, which makes up two-thirds of our economic growth.

The Federal Reserve will be factoring in the high oil price and its economic impact as they consider rate hikes and ultimately shrinking their balance sheet.

Fed rate hikes are designed to slow demand and thus lower prices. If the consumer retreats on their own due to higher energy prices, the Fed may not be able to hike as aggressively as they intended when the year began.

Bottom line: This new Russian/Ukraine war changes everything. If you are considering a refinance or purchase transaction, now is the time when there is a lot of uncertainty. Upon better days ahead, we should expect somewhat higher rates.

The Elephant in the Room

February 28, 2022jordanreedNews

Last Week in Review: The Elephant in the Room

Interest rates improved slightly this week in response to the Russian invasion of Ukraine. This story is evolving every moment and the current uncertainty is helping bonds and rates. Let’s discuss what this all means for our economy and the Federal Reserve’s actions.

1.) Safe-Haven Trade is On

When bad geopolitical events take place, like Russia attacking Ukraine, global funds seek the “safe-haven” of the US Dollar and Treasuries, with mortgage-backed securities (MBS) also seeing higher prices and lower yields.

All risk assets, like stocks and cryptocurrencies, are selling off with the proceeds being parked in cash and Treasuries.

We don’t know how long the Russia/Ukraine war will last and we can only hope and pray for limited human toll and relative containment. As the story evolves, from minute to minute, it will move the financial markets. If the story worsens, we should expect rates to continue to track at or better than current levels. However, any signs of improvement in the situation would unwind some of the safe-haven trade causing rates to move back up.

It is worth noting, at the time of this writing, the improvement in rates has been quite modest given the magnitude of negative sentiment and uncertainty surrounding the invasion.

Let’s hope the sanctions applied to Russia move the needle and help push the story in a positive direction.

2.) Further Pain at the Pump

Upon word of the invasion, oil prices hit $100 a barrel. This is awful for our economy. It will lead to another rise of gas at the pump and, just before the busy summer driving season. A Summer that is likely to be a bit more normal with Omicron and Covid moving behind us. There will be enormous pressure on our government to take measures to lower oil prices. If oil remains at or higher than current levels, it will hurt consumer spending which makes up two-thirds of our economy. Think about it – if people are putting more money in their tank or spending more to heat their home, it will come at the expense of other goods and services.

Oil is in everything, especially so in housing. It takes oil to build and deliver tons of materials. In the era where 7 out of 10 families are currently unable to qualify for a median-priced new home, sustained high oil will only exacerbate this problem.

Let’s hope our government has a solution to provide meaningful and sustained relief, or we could experience an economic slowdown with higher prices – the very definition of stagflation.

3.) Fed Uncertainty Escalates Further

The Fed entered 2022, much like it did back in 2018, with a hawkish tone and a desire to raise rates several times. Back in 2018, the Fed raised rates three times which slowed the economy and hurt consumer sentiment.

Presently, the backdrop has gotten rather bleak. Consumer Sentiment is presently at an 11-yr low, and this is not factoring in the Russia/Ukraine war and Oil at $100. Additionally, financial conditions have already tightened, and small business sentiment has declined. These are not conditions in which the Federal Reserve wants to, nor can, hike rates multiple times.

The probability of a .50% rate hike has gone from 100% to just .15% in the span of the week. So, the Fed will hike rates next month by .25% to help fight consumer inflation, which is running at 7.5%.

What will the Fed do later this year? Will inflation rise further and force the Fed to do more? Can the Fed really do more? These are all big unanswered questions that will not be figured out until time passes. Until then, expect high volatility and push/pull market action between a safe-haven trade (good for rates) and high inflation (bad for rates).

Bottom line: This new Russian/Ukraine war changes everything. If you are considering a refinance or purchase transaction, now is the time when there is a lot of uncertainty. Upon better days ahead, we should expect somewhat higher rates.

Three Reasons Why Rates Might Have Peaked

February 22, 2022jordanreedNews

Last Week in Review: Three Reasons Why Rates Might Have Peaked

Interest rates ticked up to their highest level in over two years but were able to finish the week off of the highest levels. Could rates have peaked? Let’s discuss why this may be so and look ahead to next week.

1.) Financial Conditions Have Already Tightened

Part of the Fed’s mandate is to maintain price stability (inflation). The Fed helps lower inflation by raising the Fed Funds Rate, which tightens monetary conditions and slows economic demand. If demand slows, prices come down.

Even though the next Fed Meeting is still one month away, and the Fed has not hiked rates since 2018, financial conditions have already tightened. The hawkish rhetoric and threats of multiple rate hikes have pushed up rates over the past 2 months to the highest levels in years. This has already had an impact on housing.

Of course, refinance mortgage activity is down sharply and that is to be expected with 30-yr rates up nearly 1% this year.

Now we are seeing an impact on new home sales. When you combine the lumber inflation, additional supply chain-related costs, and the recent uptick in rates, the National Association of Homebuilders reports that nearly 7 out of 10 borrowers can’t afford a new median-priced home. This is an unsustainable trend. Either rates must come down a little to provide relief or home prices must come down or a combination of both.

Last Summer, in front of Congress, Fed Chair Jerome Powell was heavily criticized for creating “froth” in the housing market by purchasing mortgage-backed securities every month. What we don’t know is how much “froth” the Fed wants to remove from the housing market. It’s hard to imagine the Fed tightening conditions and allowing mortgage rates to increase so much that housing sees a sharp slowdown.

2.) Things Are Not All That Peachy

In addition to the inflation problem, the economy is decelerating. Economic growth is slowing. The consumer is assuming more credit card debt to pay for items and fuel costs are soaring. This is a very difficult environment for the Fed to hike rates aggressively.

Moreover, consumer sentiment and small business sentiment are down sharply with the former at 11-year lows. In this environment with high inflation and low consumer sentiment, the Fed may try to be more patient with a hike rate and wait before approaching. Seeing the 10-yr Note yield decline beneath 2.00% suggests the bond market is not worried about runaway inflation but may be looking at the notion of slower economic times ahead.

3.) Russia/Ukraine Remains Unresolved

Uncertainty around Russia and Ukraine continues. When uncertain geopolitical events take center stage, the investment community adopts a risk-off trade and buys US-denominated assets like the US Dollar, Treasuries, and even MBS.

There is a fear Russia will indeed invade Ukraine and this will send the price of oil above $100 quickly. High oil prices are a killer. It’s a tax on consumers that goes uncollected. Should the Russia/Ukraine story escalate, and oil prices head higher, the Fed will have to soften its tone and be more dovish or accommodative. The opposite is true – if Russia/Ukraine comes to a political resolution, we could easily see rates pop back higher as the uncertainty is lifted. The longer this story lingers the less likely the Fed can be hawkish and hike rates.

Bottom line: The uncertainty and slowing in some sectors of our economy is giving interest rates some relief. This story could change quickly, and rates could easily creep back up and strike new multi-year highs. If you are considering a mortgage, now is a great time amidst the uncertainty and modest rate relief.

Inflation, Fed, Uncertainty – Oh My

February 11, 2022jordanreedNews

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.

Three Things Moving the Markets

February 7, 2022jordanreedNews

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.

Fed Meeting Breakdown

January 31, 2022jordanreedNews

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.

Rates are Fed Up

January 24, 2022jordanreedNews

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.

Omicron Hits the Financial Markets

December 27, 2021jordanreedNews

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.

Fed Meeting Highlights and Market Reaction

December 20, 2021jordanreedNews

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.

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