Fed Hopes Get Dashed

After the Consumer Price Index (CPI) report showed inflation retreated more than anticipated, pundits are filling the airwaves of financial networks arguing their perspectives of whether this report will influence the Fed to “Pause” sooner than previously thought. Although it is clear our economy is slowing, it seems that many are prematurely getting their hopes up. The Fed has been unwavering that until we see the labor market loosen, they will continue to tighten.

At this point, I anticipate a 50-basis point move when the Fed meets next in December. However, the Fed will receive a couple more consumer inflation reports, as well as a reading from the Bureau of Labor Statistics on the health of the labor market for November.

If new information continues to show a slowing economy, the Fed may trim down to a 25-basis point increase. I don’t expect we will see enough of a reduction in the labor market for the Fed to consider “Pausing” just yet. We really need to see Unemployment Claims rise above 300,000 a week for the Fed to be satisfied.

On Friday we will receive a report on Existing Home Sales, which are expected to show a continued slowdown. With the massive increase in mortgage interest rates that we have seen this year, we are experiencing the biggest hit to housing affordability in our lifetime over such a small period. After average interest rates hit 7%, new listings fell sharply, and housing activity hit lows not seen since 2008.

We know the Federal Reserve is watching this closely and can quickly bring the housing market back to a point of stability. All they need to do is announce that they are once again in the mortgage bond market and will seek to stabilize mortgage interest rates in the 5-5.5% range. This will create a more balanced housing market. Let’s hope this happens.

Mortgage bonds are giving up some of their gains from last Thursday’s epic rally. This means locking in the near term is prudent.