Is 10 the lucky number we’ve been waiting on?

The Wire – w/ Drew

Today marks Number 10 in the consecutive rate increase battle with the FED.  This comes fresh on the heels of government data showing that U.S. economic growth slowed over the first three months of this year and amidst the recent collapse of First Republic bank which was number 3.  Yes, inflation has fallen significantly from the peak it hit in the summer of 2022 but it still remains persistently higher than the Fed’s target of 2%.

The bigger news was the tone in which was used by Fed Chair Jerome Powell where he noted the removal of a persistent sentence used in many previous announcements.  That sentence – “some additional policy increases might be appropriate.”  Powell pointedly explained that the omission of that previous commentary was “meaningful,” and went on to say that a decision about any additional rate hikes would be purely “data dependent.” This tells us that at this time the FED does not have a future planned rate hike and should the incoming data follow its current trend we can expect them to hold at the current level.  For those that have been following, you know that this is the signaling we have been waiting for since December!

Current FED Benchmark rate is now in a target range of 5% to 5.25%.

The ability to hold here is dependent on continued downward movement of data as we move forward.  If we remain on that path we can expect much of the current market volatility to subside which would bring reprieve to the current heightened rates allowing them to settle back down into the low 6% range.  Some of that decrease in volatility was seen today has the 30-year Fixed rate fell from 6.75% to 6.5%.  Today we saw some of the lowest interest rates in the past couple weeks. Remember that just because the Fed hikes rates, does not mean that mortgage rates go up.  Volatility within the market has a greater impact.  With only 8 meetings per year that can result in Fed rate changes, the market has a lot of time to adjust its expectations in between those meetings as we often see. The market had already accounted for this hike, leaving only the ability to react to the changes in the Fed’s verbiage used, which was a big positive.

Current volatility continues to decrease as we approach the end of the day.  The US labor market has continued resiliency despite the barrage of rate hikes which does lead to Powell’s original hope of a soft landing being a remaining possibility.   Current projections suggest that we are at the end of the rate hikes but that the benchmark rate will be held as long as possible, my belief would be through the end of 2023.  This would allow as much time as possible for the effect on inflation to be both large and long-lasting.  We would then see the downturn of rates back into the 5’s in 2024 and a slow progression from there.

Drew Waack

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