The story that is controlling the media right now is inflation. Friday’s numbers showed inflation came in higher than expected and at a new 40-year high. The markets reacted accordingly: a stock market sell-off and mortgage rate increases. The problem now is that this opens the door for the Fed to do a 75bp rate hike this week (a 50bp hike is expected). A 75bp hike will essentially double the rate to 1.5%. If there was ever a time for the Fed to do a surprise hike/increase, now is the time.
Although the short-term volatility will be chaotic (remember, I said do not believe in the “soft landing” the Fed has talked about), long term I still believe in my thesis that the Fed will be forced to pause and then cut rates to stimulate the economy and prevent a default in the debt markets. Having said that, I also don’t believe that the worst is over and we may see things get worst before they get better. The future problem is when the Fed will eventually be forced to cut rates, we will still have to deal with higher inflation.
- 1 and 3 yr NY Fed inflation expectations
- Fed Meeting Begins
- Fed Statement
- Fed Projections
- Fed Chairman Powell speaks after policy decision announced
- Home Builders Index
- Initial and Continuing Jobless Claims
- Building Permits
- Housing Starts
- Leading Economic Indicators
Last week I mentioned how everything was riding on Friday’s inflation report. You can tell from the chart below that we broke the mini channel we were into the downside. The market is expecting a 50bp rate hike but I can see Monday and Tuesday being rough days as some bet on a surprise 75bp rate hike. We get another Fed meeting in July, none in August (they meet in Jackson Hole), then again in September.
I am still not floating. I mentioned I will only bring back the possibility of floating rates when we get peak inflation numbers. That has not occurred yet. When it does, the markets will rejoice and we may see a Fed rate hike pause as they celebrate their accomplishment of stabilizing inflation.
I have been utilizing the Lock and Live program, as well as our extending locks, for clients and it has been very successful in protecting them from the inflation risks. I plan on continuing to utilize these programs as well as lock as soon as I can. Ever since the Fed started increasing rates, any “relief” days we see have been temporary and not a true indicator of a reversal.
As I said in an earlier newsletter, “Don’t Fight the Fed.” And as long as inflation remains high, we have a general idea of what they will be doing.