Inflation and the Fed and Mortgage Rates

Sovereign Lending Group’s clients see in the press a lot about “soft landings” or “hard landings” when it comes to the impact on the economy from the Federal Reserve’s actions. This impacts mortgage rates, of course, since a hard landing would foster a recession and lower rates. But few want a recession, including Sovereign’s management.

Of course, our “Fed” doesn’t act in a vacuum, and central banks around the globe will have to respond to a growth slowdown as risks of financial system instability grow louder. The need to moderate on aggressive monetary policy was also present in last week’s release of the minutes from the Fed’s latest meeting, though some caution that it was the same usual chatter and only a perceived shift in tone. “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate,” according to records from the Nov. 1-2 gathering. “A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability.”

Sovereign’s clients should be aware that some economists, investors, and bond traders predict more inflation ahead. The persistence of inflation meant that the federal funds rate may have to go higher than they previously expected to achieve the central bank’s goal of bringing down price pressures. The word “inflation” was even mentioned 95 times in the minutes, remaining the primary focus on the gathering.

The good news for anyone feeling the strains of prices going up is that while the Consumer Price Index rose less than expected in October (headline inflation +7.7% Y/Y and core at +6.3% Y/Y), only time will tell if the central bank has really decided it’s time to loosen the belt.

Some will tell us that the Fed intends to slow down to allow more time for lags to operate and cumulative tightening to date to show up in the data. The hawkish talk from Powell in the press conference and many Fed officials subsequently is intended to provide “air cover” for the slowing to take place without an excessive easing of financial conditions.

As our loan officers continue to remind our clients, the Federal Reserve Bank of the United States doesn’t set mortgage rates. But the same economic conditions that drive its decision making drive interest rates in general, including ours. It’s always good to keep up on what’s going on out there!