Monday Mortgage Minute – The Fed’s Admission and What Comes Next #thefed #rates #jeromepowell

Called it! I called it. Last week I said that the Fed was in between a rock and hard place and that the way they approach their press conference would be VERY telling about how they view the markets, bank stress, and whether they’re winning the fight against inflation. Remember last week? You remember right? 

 [From last Week’s episode] “What I’m looking for next week is to see how much of their time in front of camera is spent addressing their longstanding goals versus what they feel they need to address to restore confidence to the American population that their money will be safe in the institutions that have come under duress over the last two weeks. This will be a very critical meeting for the Fed to do 100% accurately otherwise this will signal they are actually way more worried about the system than they are leading on, and therefore abandoning the other issues that they have been telling us are their primary concerns for nearly a year. They HAVE TO GET THIS RIGHT.” 

 So what happened? Jerome Powell had to get up there and do a dog and pony show, do a little bit of a dance and try to very creatively answer reporters’ questions while also not throwing the markets into a complete freefall – all while trying to avoid issuing contrary statements and he was struggling. I kind of feel bad for him, kind of.  At one point he mentioned the recent bank collapses would be under independent investigation when days prior it was revealed that SVB had already been in oversight, so how did they get caught off guard? It just doesn’t make sense! And then he had to deliver difficult news about unemployment but before we get to that remember this from a few weeks ago? 

[From 3 Week’s Ago!] “Thursday March 2nd unemployment was pretty much the same as the previous week, pretty low, and a non-issue EXCEPT FOR THE FACT THAT THE FED NEEDS TO SEE MORE UNEMPLOYMENT AND IT’S NOT HAPPENING!!! They’re totally going to raise rates again, especially because the labor market isn’t softening like they need it to.” 

See? Even though we had bank failures since that was aired, the fed had no choice but to stick with a rate hike because they aren’t seeing the inflation return to 2% like they want…so they just have to keep going. They also had to keep going to communicate that the recent bank failures are not paramount to their primary objectives of returning inflation to 2%, softening in the labor market (code for increasing unemployment), and restoring price stability to the markets. Pausing would have been interpreted that they’re abandoning their main goals they’ve been telling us about for nearly a year! And that bank failures aren’t over, and are a bigger problem than we know about. 

Look, I hate to be the one to communicate this but Jerome Powell clearly stated they need unemployment to be at 4.5%. The most recent unemployment reading was 3.6% which means they need unemployment to go up almost a WHOLE PERCENT in order to create the demand destruction The Fed needs to see –  in order to slow down spending which will reduce prices, thus decreasing inflation and restoring to price stability. Less money to spend brings prices down because dollars chase products when there’s too much money in the system, and products chase dollars when the dollars become more scarce…the only way to separate people from their cash, is to reduce prices….thus eventually bringing inflation down to 2%…which then also achieves restoring price stability. But let that sink in a second, if we have approximately 160 Million people employed according to the Bureau of labor and statistics, 1% more unemployment is roughly 1.6 million more people hitting the unemployment lines to bring down inflation….that’s a lot. Like a Lot a lot!!! 

And this leads me to the another doozy from the press conference. When asked about whether or not he was worried about unemployment causing a snowball effect he said that reducing inflation is not linear, but as you can see from this explanation the snowball is exactly what will help cause inflation come down and so to try to avoid one would run counter to the logic that the snowball is actually what causes the outcome they need to see. It really sucks to say this, but they’re telling us that they need more pain in order to achieve their goals, and I hate to put it that way. However, they said it and even showed their charts projecting future rate expectations and inflation figures. 

Yes it’s a problem from last week’s press conference though, Jerome Powell put up a dot plot chart that showed their expectation of being back to 2% inflation in 2025…that’s 2 years from now. Which means they cannot deliver the “soft landing” it was not “transitory” it has become “sticky” and currently “entrenched” until “more pain” makes it’s way through the economy. 

So what’s this all mean for mortgage rates Andy? 

Mortgage rates were all over the place like I said they would be and this will remain the case moving forward because of the Statements Jerome gave and the interpretation of the press conference answers. Some of this was really telling! 

This week we’re not even reviewing economic reports because it all really pales in comparison to all the items Jerome Powell covered last week. Yes the data will matter looking forward, but what everyone’s focused on right now is banking stability, and digesting what the Fed said in order to brace up for the remainder of 2023, 2024, and into 2025…I can’t believe I’m saying that. 

And before you think I’m being negative I’m simply giving you front row feedback from what the Fed actually said, the reasoning and rationale they gave for their decision, and my previous experience in this industry through 2008 and 2009. We already had a front row seat to difficult economic times once during our business lifetime, and everything happening right now indicates that they are doing their best job, however the results they seek are still not on the horizon in the near future. 

As I said last week you really just need to be prepared for mortgage rates to be extremely volatile. It might sound like I’m overreacting to say that banks are on pins and needles watching every single move, every single word being said, every single thing not being said, and every piece of data that could influence the market one way or another, but right now uncertainty rules in all aspects of the financial markets. Depositor banks are very quickly reassessing their risk and exposure, mortgage lenders are readjusting pricing, the equity markets are trying to find their footing, and all the while residential homeowners are currently hunkered down with their fixed low rates they got in the last two years waiting it out to see what happens next. 

if you are currently in escrow and looking to lock your loan this week, be sure you are getting rate alert from your loan officer that notifies you and them every time mortgage rates increase or decrease during the open trading sessions Monday through Friday. On days where there may be uncertainty in other parts of the market, money can find its way into mortgage-backed securities and when there is more supply there is decrease in rates. Also Please remember that banks are in the business of making money, and they make that money by lending out funds to people like you and me. So there will be a point at which the rate environment must become more appetizing in order for them to begin lending out money more regularly in order to increase loan revenue, because in the end that’s what banks do and that’s how they make their money. 

If you have questions and you wish to talk with one of us here on the team please send us a direct message, email, call or text so that we can help you make the best choice considering all the circumstances facing you and your family. Again, we’ve been at this for 18 years and we have our finger on the pulse of what’s happening in the markets. Wherever we can help you win in mortgage and real estate we want to help you win. We want you to feel secure and confident about your financial future when it comes to your mortgage options and your real estate holdings. 

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