Lesser of Two Evils: Did the Fed get it Right?!?


They did it again! Last week the Federal Reserve paused interest rate hikes and mortgage rates immediately went up higher for two days consecutively. Jerome Powell and the federal reserve last Wednesday but left room for a possible rate hike in November. So the question is: If they know they might need room to raise rates in November then why not raise rates right now? Do they think that we have finally accomplished their stated goals and we just need more time in order for all those target metrics to be hit? Are they concerned that maybe they went too far and that all lagging indicators will be showing up at the same time – or – possibly now too quickly? Or is there another reason they haven’t stated that’s causing them to leave themselves some wiggle room in order to raise rates in November? And if they do raise rates in November, then that means that the data is not in support of what they need it to be in order to have done that at this last meeting. Despite everyone saying that it makes sense, when you look at all the details- it really doesn’t make sense does it? It’s almost like saying “Oops, we should have done this one last time in September, and since we didn’t, it’s now a mistake we have to compensate for.” ….Great!

And that leads me to what we’ll be talking about next: What does the future of mortgage and real estate look like if the Federal Reserve themselves are saying that they have to leave interest rates higher for longer and that the lagging effects of monetary policy decisions have yet to make their full impact on the economy? Simply stated this means that they are waiting for unemployment to continue cooling and for inflation to get closer to 2% before they make their next decision. And that isn’t even the unsettling part- the unsettling part is that 2024 could be a year where they keep rates exactly where they are at without even being able to offer the markets or the economy a rate reduction. And why is that Andy? Because it has taken us 18 months to get this far and if they raise rates in November then it will be 20 months since their initial rate hikes began in March of 2022. And THAT means if it could take that same amount of time to finally end their prescribed course of fiscal policy tightening, then now we’re not talking about rate cuts until 2025. Thaaaaat could be too late. Expect rate cuts to start in 2024, cause that’s we’re gonna need them.

Look, I really want to believe that the Fed has chosen the lesser of two evils when it comes to battling inflation and trying to restore price stability in the markets. However, this little exercise over the last year and a half has been very challenging for so many reasons: not to mention mortgage and real estate being in the Direct Line of fire of these policy changes. We have historic unaffordability, interest rates the highest they’ve been in 23 years, delinquencies the lowest in 27 years because of the mortgage market refinancing half the country with the lowest mortgage rates that we’ve ever seen back in 2021 and 2022 (which also happened to be the two highest years of mortgage origination volume ever recorded on history). Coupled to these things we have a resilient consumer and continued spending – even if it is with credit cards. We have seen that inflation which recently bottomed out and has made an uptick that now leaves us asking when will we actually see the true decline that they have been asking for.


So here are three things you want to watch for between now and the federal reserve’s next meeting in November 2023.

#1 Core PCE- this is the feds favorite measurement of inflation, and it needs to get as close to 2% as possible as quickly as possible. Anything above 3% is still a threat to their overall goal.

#2 We need to see unemployment getting closer to 4.5% percent – yes, I know that sounds painful and I know that means a lot of people are going to face financial duress; However this is exactly what they have been telling us they need to happen in order to reduce the amount of dollars in the economy chasing the amount of goods being sold.

#3 We need to see fewer job openings and more early retirements which both eliminate the total number of Americans in the workforce. The secondary effects of this ultimately help price stability restore because when demand cools prices have to come down.

Will we see each of these moves in the right direction between now and November? We’re just going to have to wait; however, these are 3 key indicators are primary for the Fed to see they are making progress so that they pause rate hikes in November rather than raise rates one final time

So with that, let’s take a quick look at what’s coming up in the markets this week.

Monday: Fed member Neil Kashkari speaks, and will likely only parrot what Jerome Powell told us last week.

Tuesday: Consumer Confidence and New Home Sales both come out.

Wednesday:  We get Durable Goods Orders and Core durable goods orders

Thursday: Final GDP Quarter over Quarter is released ß This will be important for knowing whether or not we can achieve a “soft landing” or if we have trouble brewing on the horizon. WE also get unemployment claims pending home sales and Fed Chair Jerome Powell Speaks…Don’t expect him to say anything different…he’s gonna play this one pretty safe.

Friday: Core PCE Price Index and Revised Consumer Sentiment. Keep one eye open on that one, revisions can sometimes be tricky and in recent history, some revisions have been really ugly, but since they are not the most popular topic of the day…the powers that be can get away with sneaking really bad news into these rearview looking data points.

Thanks again for tuning in to Monday Mortgage Minute.

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