MMG Weekly | 6.20.2022
A Look Into the Markets
This past week, the Federal Reserve raised the Federal Funds Rate by .75%, the first such hike since 1994. Let's walk through what the Fed said and how the financial markets reacted heading into the weekend.
"Clearly, today's 75 basis point increase is an unusually large one and I do not expect moves of this size to be common," Federal Reserve Chair Jerome Powell.
The largest rate hike in 28 years comes on the heels of the recent Consumer Price Index report, which showed a surprising spike higher in inflation. Up until that reading, the Fed Chair had led the markets to believe the Fed would only raise rates by .50%. However, true to his word, he said the Fed would "be nimble" and respond to the incoming data.
In addition to the rate hike, the Federal Reserve released their updated forecasts on the economy. They raised their expectations on inflation almost a full point from 4.3% to 5.2%. And they lowered their economic growth forecast from 2.8% to 1.7%. Lastly, they raised their forecast for the Federal Funds Rate from 1.9% to 3.4%. On the heels of Wednesday's rate hike the Fed Fund Rate is now in a range of 1.50 to 1.75% so the markets are currently expecting about an increase of 1.75% to the Fed Funds rate between now and year-end.
As of this moment, the Fed sees the economy slowing, prices remaining high, and they will be raising rates even higher to help lower inflation.
"I think events of the last few months have raised the degree of difficulty, created great challenges, and there's a much bigger chance now that it will depend on factors that we don't control." Federal Reserve Chair Jerome Powell.
This quote highlights the challenge of the Fed. Can they administer a soft or as Powell says a "soft-ish" landing and avoid an economic recession after hiking rates further?
When Powell says it depends on factors they can't control, he means energy prices. Powell said, "we have no effect on energy prices". This makes things harder for the Fed because energy prices are the major contributor to inflation and increasing rates will not have an impact.
It's important to remember that Fed rate hikes have zero correlation with mortgage rates. It may seem contrarian, but rate hikes are intended to slow demand and lower inflation, which is good for long-term rates as it protects their value over time.
Back to the Future
In 1994, Fed Chair Greenspan raised rates by .75% and at that very moment, long-term rates like mortgages peaked. We will find out if history repeats itself upon Powell's .75% rate hike this past Wednesday.
For the foreseeable future, expect continued market volatility and uncertainty as we watch to see if inflation peaks and how much the Fed will hike rates – all while avoiding a recession.
As we watch to see if long-term rates peak due to the more hawkish Fed and .75% rate hike, an incredible opportunity remains in housing. Home loan rates remain beneath the current rate of inflation which is something that has not happened in nearly 50-years.
Next week we will get a reading on Consumer Sentiment. It currently stands at a historic low as folks have concerns on inflation and the direction of the economy. If the consumer pulls back on spending due to higher energy prices and overall concerns, it will elevate the fears of recession as consumer spending is nearly two-thirds of our economic growth.
Mortgage Market Guide Candlestick Chart
Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 4.5% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.
You can see the right side of the chart where prices fell to new 2022 price lows - meaning 2022 rate highs. We shall find out if these are the price bottoms/rate peaks after the Fed's tough action this past week.
Chart: Fannie Mae 4.0% Mortgage Bond (Friday Jun 17, 2022)
Economic Calendar for the Week of June 20 - June 24
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As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.