Don't Fight The Fed
Hello everyone. Welcome back to the Mortgage Rundown. Today we are going to talk about what’s happening in the capital markets.
It should be no surprise that interest rates continue to climb. The FOMC came out last week and raised their benchmark rate up one-quarter of one percent. This was widely expected but the big item on the agenda was their forecasts for interest rates for the end of 2022 and 2023. They raised their forecast for 2022 with an expected seven increases to rates by the end of year. And oh, by the way, including the March meeting, there are seven meetings left in 2022, which means they are expecting to raise rates at every meeting effectively.
Now if that wasn’t hawkish enough, Jerome Powell came out this week and said the committee would consider raising rates up to 50bps in the next meeting on May 4th to combat inflation. This has sent interest rates up even higher and if you look at the graph on your screen, you can see that rates have been climbing very quickly in March after rising pretty rapidly in December, January, and February.
The Federal Reserve has shifted very quickly from a long stance of transitory inflation to ringing the inflation alarm bell.
With rates rising so quickly and inflation so prevalent, one of the things we will want to keep an eye on is the yield curve. The spread between the 2yr and 10yr Treasury is generally a good inflation indicator if that spread goes negative for a period of time. The 2’s 10’s spread has tightened a ton over that last year and is moving pretty close to zero.
The Fed raising interest rates so much so quickly will cause a lot of chatter about the possibility of a recession. But as of right now, the Fed has to worry about inflation and hopefully if inflation starts to return to normal, they will be quick to adjust and take their foot off the brakes on the economy.
That’s it everyone from the capital markets desk this week. Thank you all for watching and have a great day.