In the light of all the debt ceiling negotiations where no one is happy, but everyone seems to be patting themselves on the back for striking a deal nontheless, mortgage rates really went up dramatically two weeks ago, but then last week they eased back down to where they came from.
Now we start off the month of June in the exact same rate environment that we were in during the middle May. Effectively no noticeable change if you eliminate the last 2 weeks of chart activity.
Now we have to about it, Debt Ceiling. Well, it finally happened both the House and the Senate passed the debt ceiling bill. There’s still a lot of dust to settle, but for now we have to return our full focus and attention back to data points that effect interest rates for the foreseeable future. We’re coming up on “dark week,” which is the week before the Federal Reserve comes out with their interest rate decision, policy statement, and press conference Q & A. They have a lot of pressure on them this month because inflation is not slowing fast enough, more jobs are being created than projected AND their desired unemployment number isn’t being met. In fact, they need unemployment to be 4.5% and it’s still only at 3.7%.
As contrary as it sounds, the fight against inflation is showing that there still may be quite a ways to go before they actually see the outcome they’re hoping for. Take that unemployment rate for example. It was 3.7% in the month of May, and they need it to be 4.5% by the end of the year. Unemployment pressure on spending generates a force effect that they claim is similar to raising rates, but since it’s so slow to make its way through the economy, they are really getting themselves in a bind. Essentially when unemployment is low, spending continues, and higher prices remain. When unemployment spikes, spending gets curbed, and prices can ease or come down. So if they can’t rely on unemployment to aid in price reductions, then that means the Fed still has plenty of room for future rate increases in order to generate downward pressure against inflation and claim victory.
But it gets even worse for the Fed. Up until this point, their communication has been the terminal rate needs to be between 5.0-5.25% which we are at right now….and the data points they’re measuring to gauge success or failure aren’t playing along. So now we have a real toss up of what will happen at the June Fed meeting. Will they raise rates and once again adjust their target terminal rate to 5.5% 5.75%, or higher? Will they pause at this meeting in the hopes that data comes around in their favor before the July meeting and that next rate decision?
I mean, we could legitimately be starting down the barrel of a policy vs. expectations vs. reality standoff.
So if they need more time to wait for impacts to hit the data like they are expecting, will it happen this month? or the next month? Or the month after that? And how long will they continue to kick the can down the road before they have to take action again by increasing rates.
Since nobody knows, this is the big unanswered question and the elephant in the room. If the Fed is going to tell us that they are responsible for monetary policy, maximum employment, and price stability, then they are really going to take one in the chin when it comes to who’s to blame for those things not happening and also for failing to fight inflation fast enough. It’s almost a lose lose situation and a slow burn because the data continues to work against them very very slowly. Painfully slowly.
Here’s a quick look at what we’re watching in the markets this week:
Monday: ISM Services PMI which has seen a precipitous decline in 2023 so far
Thursday: Unemployment claims takes the stage, and based on what we talked about today…it will be an important measurement.
Other than that, there’s nothing earth shattering coming out this week. Set your eyes on Wednesday June 14th and let’s see what the Fed does next!
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