Tag: Interest RAtes

Employment Slump: US Adds Fewest Jobs in Six Months, Jobless Rate Edges Up

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market is finally starting to feel the chill from the Federal Reserve’s aggressive interest rate hikes over the past year. April’s employment report revealed clear signs that robust hiring and rapid wage growth are cooling in a shift that could allow central bankers to eventually take their foot off the brake.

Employers scaled back hiring last month, adding just 175,000 workers to payrolls – the smallest increase since October and a notable deceleration from the blazing 269,000 average pace over the prior three months. The unemployment rate ticked higher to 3.9% as job losses spread across construction, leisure/hospitality and government roles.

Perhaps most crucially for the inflation fighters at the Fed, the growth in workers’ hourly earnings also downshifted. Wages rose just 0.2% from March and 3.9% from a year earlier, the slowest annual pace in nearly three years. A marked drop in aggregate weekly payrolls, reflecting weaker employment, hours worked and earnings, could presage a softening in consumer spending ahead.

“We’re finally seeing clear signs that the labor market pump is losing some vapor after getting supercharged last year,” said Ryan Sweet, chief economist at Oxford Economics. “The Fed’s rate hikes have been slow artillery, but they eventually found their target by making it more expensive for companies to borrow, hire and expand payrolls.”

For Federal Reserve Chair Jerome Powell and his colleagues, evidence that overheated labor conditions are defusing should be welcome news. Officials have been adamant that wage growth running north of 3.5% annually is incompatible with bringing inflation back down to their 2% target range. With the latest print under 4% alongside a higher jobless rate, some cooling appears underway.

Still, policymakers will want to see these trends continue and gain momentum over the next few months before considering any pause or pivot from their inflation-fighting campaign. Powell reiterated that allowing the labor market to re-rebalance after an unprecedented hiring frenzy likely requires further moderation in job and wage growth.

“This is just a first step in that process – we are not at a point where the committee could be confidence we are on the sustained downward path we need to see,” Powell said in a press conference after the Fed’s latest rate hold. “We don’t want just a temporary blip.”

Within the details, the latest report offered some signals that could extend the moderating momentum. Job losses spread across multiple interest rate-sensitive sectors, including housing-related construction roles. The number of temporary workers on payrolls declined for the first time since mid-2021.

And while the labor force participation rate was unchanged, the slice of Americans aged 25-54 who either have a job or are looking for one hit 83.5%, the highest since 2003. If that uptrend in prime-age engagement persists, it could help further restrain wage pressures by expanding labor supply.

Of course, the path ahead is unlikely to be smooth. Many companies are still struggling to recruit and retain talented workers in certain fields, which could keep wage pressures elevated in pockets of the economy. And any resilient consumer spending could stoke demand for labor down the line.

But for now, April’s figures suggest the much-anticipated pivot towards calmer labor market conditions may have finally arrived. The Fed will be watching closely to see if what has been a searing-hot job scene can transition to a more manageable lukewarm trend that realigns with its price stability goals. The first cracks in overheated labor demand are emerging.

Fed Keeps Interest Rates at Historic 23-Year High

Posted on by slightbourne@noblecapitalmarkets.com

In a widely anticipated move, the Federal Reserve held its benchmark interest rate steady at a towering 5.25%-5.5% range, the highest level since 2001. The decision reinforces the central bank’s steadfast commitment to quashing stubbornly high inflation, even at the risk of delivering further blows to economic growth.

The lack of a rate hike provides a temporary reprieve for consumers and businesses already grappling with the sharpest lending rate increases since the Volcker era of the early 1980s. However, this pause in rate hikes could prove fleeting if inflationary pressures do not begin to subside in the coming months. The Fed made clear its willingness to resume raising rates if inflation remains persistently elevated.

In its latest policy statement, the Fed bluntly stated there has been “a lack of further progress toward the committee’s 2% inflation objective.” This frank admission indicates the central bank is digging in for what could be an extended trek back to its elusive 2% inflation goal.

During the subsequent press conference, Fed Chair Jerome Powell struck a hawkish tone, emphasizing that policymakers require “greater confidence” that inflation is headed sustainably lower before contemplating any rate cuts. This stance contrasts with the Fed’s projections just two months ago that suggested multiple rate reductions could materialize in 2024.

“I don’t know how long it will take, but when we get that confidence rate cuts will be in scope,” Powell stated, adding “there are paths to not cutting and there are paths to cutting.”

The Fed’s preferred core PCE inflation gauge continues to defy its efforts thus far. In March, the index measuring consumer prices excluding food and energy surged 4.4% on an annualized three-month basis, more than double the 2% target.

These stubbornly high readings have effectively forced the Fed to rip up its previous rate projections and adopt a more data-dependent, improvised policy approach. Powell acknowledged the path forward is shrouded in uncertainty.

“If inflation remains sticky and the labor market remains strong, that would be a case where it would be appropriate to hold off on rate cuts,” the Fed Chair warned. Conversely, if inflation miraculously reverses course or the labor market unexpectedly weakens, rate cuts could eventually follow.

For now, the Fed appears willing to hold rates at peak levels and allow its cumulative 5 percentage points of rate increases since March 2022 to further soak into the economy and job market. Doing so risks propelling the United States into a recession as borrowing costs for mortgages, auto loans, credit cards and business investments remain severely elevated.

Underscoring the challenging economic crosswinds, the policy statement acknowledged that “risks to achieving the Fed’s employment and inflation goals have moved toward better balance over the past year.” In other words, the once-overheated labor market may be gradually cooling, while goods price inflation remains problematic.

The only minor adjustment announced was a further slowing of the Fed’s balance sheet reduction program beginning in June. The monthly caps on runoff will be lowered to $25 billion for Treasuries and $35 billion for mortgage-backed securities.

While seemingly a sideshow compared to the main event of interest rate policy, this technical adjustment could help alleviate some recent stresses and volatility in the Treasury market that threatened to drive up borrowing costs for consumers and businesses.

Overall, the Fed’s latest decision exemplifies its unyielding battle against inflation, even at the cost of potential economic pain and a recession. Having surged the policy rate higher at the fastest pace in decades, returning to a 2% inflation environment has proven far trickier than battling the disinflationary forces that characterized most of the post-1980s era.

For investors, the combination of extended high rates and economic uncertainty poses a challenging environment requiring deft navigation of both equity and fixed income markets. Staying nimble and diversified appears prudent as the ferocious inflation fight by the Fed rages on.

Powell Dashes Hopes for Rate Cuts, Citing Stubbornly High Inflation

Posted on by slightbourne@noblecapitalmarkets.com

In a reality check for investors eagerly anticipating a so-called “pivot” from the Federal Reserve, Chair Jerome Powell firmly pushed back on market expectations for interest rate cuts in the near future. Speaking at a policy forum on U.S.-Canada economic relations, Powell bluntly stated that more progress is needed in bringing down stubbornly high inflation before the central bank can ease up on its aggressive rate hike campaign.

“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said of getting inflation back down to the Fed’s 2% target goal. “That said, we think policy is well positioned to handle the risks that we face.”

The comments represent a hawkish doubling down from the Fed Chair on the need to keep interest rates restrictive until inflation is subdued on a sustained basis. While acknowledging the economy remains fundamentally strong, with solid growth and a robust labor market, Powell made clear those factors are taking a back seat to the central bank’s overarching inflation fight.

“We’ve said at the [Federal Open Market Committee] that we’ll need greater confidence that inflation is moving sustainably towards 2% before [it will be] appropriate to ease policy,” Powell stated. “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.”

The remarks dash any near-term hopes for a rate cut “pivot” from the Fed. As recently as the start of 2024, markets had been pricing in as many as 7 quarter-point rate cuts this year, starting as early as March. But a string of hotter-than-expected inflation reports in recent months has forced traders to recalibrate those overly optimistic expectations.

Now, futures markets are only pricing in 1-2 quarter-point cuts for the remainder of 2024, and not until September at the earliest. Powell’s latest rhetoric suggests even those diminished rate cut bets may prove too aggressive if elevated inflation persists.

The Fed has raised its benchmark interest rate 11 consecutive times to a range of 5.25%-5.5%, the highest in over two decades, trying to crush price pressures not seen since the 1980s. But progress has been frustratingly slow.

Powell noted the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, clocked in at 2.8% in February and has been little changed over the last few months. That’s well above the 2% target and not the clear and convincing evidence of a downward trajectory the Powell-led Fed wants to see before contemplating rate cuts.

Despite the tough talk, Powell did reiterate that if inflation starts making faster progress toward the goal, the Fed can be “responsive” and consider easing policy at that point. But he stressed that the resilient economy can handle the current level of rate restriction “for as long as needed” until price pressures abate.

The overarching message is clear – any hopes for an imminent pivot from the Fed and relief from high interest rates are misplaced based on the latest data. Getting inflation under control remains the singular focus for Powell and policymakers. Until they achieve that hard-fought victory, the economy will continue to feel the punishing effects of tight monetary policy. For rate cut optimists, that could mean a longer wait than anticipated.

Hotter Inflation Pushes Back Expected Fed Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

Inflation picked up speed in March, with consumer prices rising at a faster pace than anticipated. The higher-than-expected inflation data throw cold water on hopes that the Federal Reserve will be able to start cutting interest rates anytime soon.

The Consumer Price Index (CPI), which measures the costs of a broad basket of goods and services across the economy, rose 0.4% in March from the previous month. That pushed the 12-month inflation rate up to 3.5% compared to 3.2% in the year through February.

Economists had forecast the CPI would rise 0.3% on a monthly basis and 3.4% annually.

The acceleration in inflation was driven primarily by two major categories – shelter and energy costs.

Housing costs, which make up about one-third of the CPI’s weighting, climbed 0.4% from February and are now up 5.7% over the past 12 months. Rising rents and home prices get reflected in the shelter component.

Energy prices increased 1.1% in March after already jumping 2.3% in February. Gasoline costs have remained elevated despite recent pullbacks.

Stripping out the volatile food and energy components, core CPI also rose 0.4% for the month and 3.8% annually – both higher than expected.

The stronger-than-expected inflation readings make it more challenging for the Fed to start lowering interest rates in the coming months as financial markets had anticipated. Traders had priced in expectations that the first rate cut would occur by June based on Chairman Jerome Powell’s comments that inflation was headed lower.

However, following the hot March data, markets now project the Fed’s first rate reduction won’t come until September at the earliest. Some economists believe even a July rate cut now looks unlikely.

The acceleration in inflation puts the Fed in a difficult position as it tries to navigate bringing stubbornly high price pressures under control without crashing the economy. Policymakers have emphasized the need to see more concrete evidence that inflation is cooling in a sustained way before easing up on rate hikes.

Fed officials have pointed to an expected deceleration in housing costs, which tend to be sticky, as a key reason inflation should slow in the coming months. But the March data showed rents continuing to increase at an elevated pace.

The services inflation component excluding energy picked up to a 5.4% annual rate. The Fed views services prices as a better indicator of more durable inflationary pressures in the economy.

Some bright spots in the report included lower used vehicle prices, which declined 1.1%. Food costs only increased 0.1% with lower prices for butter, cereal and baked goods offsetting a big 4.6% jump in egg prices.

Overall, the March CPI report suggests the Fed still has more work to do in taming inflation back to its 2% target. Traders are now pricing in higher terminal interest rates and little chance of rate cuts in 2023 following the inflation surprise.

Persistently elevated inflation could ultimately force the Fed to hike rates higher than expected, raising risks of a harder economic slowdown. The central bank will provide more clues on its policy outlook when it releases minutes from its March meeting on Wednesday afternoon.

For consumers feeling the pinch of high prices, the March CPI data means little relief is likely coming anytime soon on the inflation front. The big question is how long stubbornly high inflation will persist and exacerbate the already difficult trade-offs facing the Federal Reserve.

Fed Keeps Rates Steady, But Signals More Cuts Coming in 2024

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve held its benchmark interest rate unchanged on Wednesday following its latest two-day policy meeting. However, the central bank signaled that multiple rate cuts are likely before the end of 2024 as it continues efforts to bring down stubbornly high inflation.

In its post-meeting statement, the Fed kept the target range for its federal funds rate at 5.25%-5.5%, where it has been since last July. This matched widespread expectations among investors and economists.

The more notable part of today’s announcements came from the Fed’s updated Summary of Economic Projections. The anonymous “dot plot” of individual policymaker expectations showed a median projection for three quarter-point rate cuts by year-end 2024.

This would mark a pivotal shift for the Fed, which has been steadily raising rates over the past year at the fastest pace since the 1980s to combat surging inflation. The last time the central bank cut rates was in the early days of the COVID-19 pandemic in March 2020.

Fed Chair Jerome Powell and other officials have signaled in recent months that softer policies could be appropriate once inflation shows further clear signs of moderating. Consumer prices remain elevated at 6% year-over-year as of February.

“While inflation has moderated somewhat since the middle of last year, it remains too high and further progress is needed,” said Powell in his post-meeting press conference. “We will remain data-dependent as we assess the appropriate stance of policy.”

The Fed’s updated economic projections now forecast GDP growth of 2.1% in 2024, up sharply from the 1.4% estimate in December. Core inflation is seen decelerating to 2.6% by year-end before returning to the Fed’s 2% target by 2026. The unemployment rate projection was nudged down to 4%.

With economic conditions still relatively strong, Powell stressed the central bank’s ability to move gradually and in a “risk management” mindset on raising or lowering interest rates. Markets expect the first rate cut to come as soon as June.

“The process of getting inflation down to 2% has a long way to go and is likely to be bumpy,” said Powell. “We have more work to do.”

The potential for rate cuts this year hinges on how quickly the lagging effects of the Fed’s aggressive tightening campaign over the past year feed through into lower price pressures. Policymakers will be closely watching metrics like consumer spending, wage growth, supply chains and inflation expectations for any signs that demand is cooling sustainably.

So far, the labor market has remained resilient, with job gains still robust and the unemployment rate hovering near 50-year lows around 3.5%. This tightness has allowed for solid wage gains, which risks perpetuating an inflationary price-wage spiral if not brought to heel.

While the road ahead remains highly uncertain, Powell stated that he feels the Fed has made enough policy adjustments already to at least pause the rate hiking cycle for now and switch into a data-driven risk management mode. This allows officials to be “patient” and avoid over-tightening while monitoring incoming information.

The Fed Chair also noted that discussions on reducing the central bank’s $8.4 trillion balance sheet began at this meeting, but no decisions have been made yet on adjusting the current runoff caps or pace.

In all, today’s Fed meeting reiterated the central bank’s intention to keep rates elevated for now while laying the groundwork for an eventual pivot to easier policy sometime later this year as disinflationary forces take deeper hold. Striking that balance between under and overtightening will be key for engineering a long-awaited soft landing for the economy.

Elevated Inflation Readings Complicate Fed’s Rate Cut Timeline

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve’s efforts to tame stubbornly high inflation are facing a fresh challenge, as new economic data released on Thursday showed price pressures are proving more persistent than expected. The latest inflation readings are likely to reinforce the central bank’s cautious approach to cutting interest rates and could signal that borrowing costs will need to remain elevated for longer in 2024.

The new inflation report came from the Labor Department’s Producer Price Index (PPI), which measures the prices businesses receive for their goods and services. The PPI climbed 0.6% from January to February, accelerating from the prior month’s 0.3% rise. Even more concerning for the Fed, core producer prices excluding volatile food and energy components rose 0.3% month-over-month, higher than the 0.2% increase forecast by economists.

On an annual basis, core PPI was up 2% compared to a year earlier, matching January’s pace but exceeding expectations. The stubbornly elevated core figures are particularly worrisome as the Fed views core inflation as a better gauge of underlying persistent price trends.

“Given the stickier than expected nature of inflation, it’s going to be very difficult for the Fed to justify a near-term rate reduction,” said Lindsey Piegza, chief economist at Stifel. “Our base case is that the Fed holds off to the second half of the year before initiating a change in policy.”

The hotter-than-anticipated producer inflation data follows a similarly elevated reading for consumer prices earlier this week. The Consumer Price Index showed core consumer inflation rose 3.8% over the past 12 months in February, also surpassing economist projections.

The back-to-back upside inflation surprises underscore the challenges the Fed faces in its efforts to wrestle price growth back down to its 2% target rate after it reached 40-year highs in 2022. Fed Chair Jerome Powell has repeatedly stressed that the central bank wants to see convincing evidence that inflation is moving “sustainably” lower before easing its monetary policy stance.

In the wake of Thursday’s PPI report, market expectations for the timing of a first Fed rate cut this year shifted slightly. The odds of an initial rate reduction happening at the June meeting dipped from 67% to 63% according to pricing in the fed funds futures market. As recently as earlier this year, many investors had anticipated the first cut would come as soon as March.

The Fed is widely expected to leave interest rates unchanged at the current 5.25%-5.5% range when it concludes its next policy meeting on March 22nd. However, officials will also release updated economic projections and interest rate forecasts, and there is a possibility some could scale back expectations for rate cuts in 2024 given the persistent inflation data.

In December, Fed policymakers had penciled in approximately three quarter-point rate reductions by year-end 2024 based on their median forecast. But the latest inflation figures cast doubt on whether that aggressive easing will ultimately materialize.

“This does leave a degree of uncertainty as to when they cut first and what they’ll do on the dot plot,” said Wil Stith, a bond portfolio manager at Wilmington Trust. “Will they leave it at three cuts or will they change that?”

Former Fed official Jim Bullard downplayed the significance of any single month’s inflation reading, but acknowledged the broad trajectory remains difficult for policymakers. “A little bit hot on the PPI today, but one number like this probably wouldn’t affect things dramatically,” he said.

With inflation proving more entrenched than hoped, the Fed appears set to maintain its policy restraint and leave interest rates at restrictive levels until incoming data provides clear and consistent evidence that the central bank’s battle against rising prices is being won. Consumers and businesses alike should prepare for higher borrowing costs to persist in the months ahead.

Inflation Refuses to Cool as Consumer Prices Surge More Than Expected

Posted on by slightbourne@noblecapitalmarkets.com

Hopes for an imminent pause in the Federal Reserve’s interest rate hiking campaign were dashed on Tuesday as new data showed consumer prices rose more than forecast last month. The stubbornly high inflation figures make it likely the central bank will extend its most aggressive policy tightening cycle since the 1980s.

The Consumer Price Index climbed 0.4% from January and 3.2% annually in February, according to the Bureau of Labor Statistics. That exceeded all estimates in a Bloomberg survey of economists who had projected a 0.3% monthly gain and a 3.1% year-over-year increase.

Stripping out volatile food and energy costs, the core CPI accelerated to 0.4% for the month and 3.8% from a year ago, also topping projections. The surprisingly hot readings marked an unwelcome re-acceleration after months of gradually cooling price pressures had buoyed expectations that the Fed may be able to begin cutting rates before year-end.

The data landed like a bucket of cold water on hopes that had been building across financial markets in recent weeks. Investors swiftly repriced their bets, now seeing around a 90% chance that the Fed’s policy committee will raise interest rates by another quarter percentage point at their March 22nd meeting. As recently as Friday, traders had been leaning toward no change in rates next week.

“After taking a step back the last couple of months, it appears inflation regained its footing in February,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “A re-acceleration could mean a longer period of policy restrictiveness is required to bring it down on a sustained basis.”

The biggest driver of February’s price spike was housing, which accounts for over 40% of the CPI calculation. Shelter costs surged 0.4% for the month and are now up a sizable 5.7% versus a year ago. While down from their 2022 peaks, those increases remain far too hot for the Fed’s comfort.

Rents rose 0.5% in February while the owners’ equivalent measure, which tracks costs for homeowners, jumped 0.4%. Both measures are watched closely by policymakers, as housing represents the heaviest weight in the index and tends to be one of the stickier components of inflation.

David Tulk, senior portfolio manager at Allianz Global Investors, said the latest shelter prints mean “the Fed’s path to restoring price stability is going to be a tough one.” He added that debate among central bankers over whether to raise rates by a quarter percentage point or go for a more aggressive half-point move now seems “settled in favor of 25 basis points.”

Energy and gasoline prices also contributed heavily to February’s elevated inflation figures. The energy index rose 2.3% last month, fueled by a 3.8% surge in gas costs. Those pressures could intensify further after recent OPEC production cuts.

Food prices were relatively contained last month, holding steady from January levels. But overall grocery costs are up 10.2% versus a year ago as the battered supply chains and labor shortages stemming from the pandemic continue to reverberate.

While this latest inflation report dealt a significant blow to hopes for an imminent pivot toward easier Fed policy, economists are still forecasting price pressures to ease over the year thanks to cooling pipeline pressures from housing and wages.

However, reaching the Fed’s 2% inflation target is likely to require a measure of demand destruction and labor market softening that could potentially tip the economy into recession. It remains to be seen if central bank policymakers will be able to orchestrate the elusive “soft landing” they have long aimed for.

Mortgage Rates and Stocks Find Relief as Powell Reinforces Rate Cut Prospects

Posted on by slightbourne@noblecapitalmarkets.com

The housing and stock markets received a welcome boost this week as Federal Reserve Chair Jerome Powell reinforced expectations for interest rate cuts later this year. In his semi-annual monetary policy testimony to Congress, Powell acknowledged that recent data shows inflation is moderating, paving the way for potential rate reductions in 2024.

For homebuyers and prospective sellers who have grappled with soaring mortgage rates over the past year, Powell’s remarks offer a glimmer of hope. Mortgage rates, which are closely tied to the Fed’s benchmark rate, have retreated from their recent highs, dipping below 7% for the first time since mid-February.

According to Mortgage News Daily, the average rate for a 30-year fixed-rate mortgage settled at 6.92% on Thursday, while Freddie Mac reported a weekly average of 6.88% for the same loan term. This marks the first contraction in over a month and a significant improvement from the peak of around 7.3% reached in late 2023.

The moderation in mortgage rates has already begun to revive homebuyer demand, as evidenced by a nearly 10% week-over-week increase in mortgage applications. The Mortgage Bankers Association (MBA) noted that the indicator measuring home purchase applications rose 11%, underscoring the sensitivity of first-time and entry-level homebuyers to even modest rate changes.

“Mortgage applications were up considerably relative to the prior week, which included the President’s Day holiday. Of note, purchase volume — particularly for FHA loans — was up strongly, again showing how sensitive the first-time homebuyer segment is to relatively small changes in the direction of rates,” said Mike Fratantoni, MBA’s chief economist.

This renewed interest from buyers coincides with a much-needed increase in housing inventory. According to Realtor.com, active home listings grew 14.8% year-over-year in February, the fourth consecutive month of annual gains. Crucially, the share of affordable homes priced between $200,000 and $350,000 increased by nearly 21% compared to last year, potentially opening doors for many previously priced-out buyers.

The stock market has also responded positively to Powell’s testimony, interpreting his comments as a reassurance that the central bank remains committed to taming inflation without derailing the economy. Despite a hotter-than-expected inflation report in January, Powell reiterated that rate cuts are likely at some point in 2024, provided that price pressures continue to subside.

Investors cheered this stance, propelling the S&P 500 to new record highs on Thursday. The benchmark index gained nearly 1%, while the tech-heavy Nasdaq Composite surged 1.4%, underscoring the market’s preference for a more dovish monetary policy stance.

However, Powell cautioned that the timing and magnitude of rate cuts remain uncertain, as the Fed seeks to strike a delicate balance between containing inflation and supporting economic growth. “Pinpointing the optimal timing for such a shift has been a challenge,” said Jiayi Xu, Realtor.com’s economist. “Specifically, the risk of a dangerous inflation rebound is looming if rate cuts are made ‘too soon or too much.'”

This ambiguity has contributed to ongoing volatility in both the housing and stock markets, as market participants attempt to gauge the Fed’s next moves. While the prospect of rate cuts has provided relief, concerns remain that the central bank may need to maintain a more hawkish stance if inflationary pressures prove more stubborn than anticipated.

Nevertheless, Powell’s remarks have injected a sense of optimism into the markets, at least temporarily. For homebuyers, the potential for lower mortgage rates could translate to increased affordability and a more favorable environment for purchasing a home. Meanwhile, investors have embraced the possibility of a less aggressive monetary policy stance, driving stocks higher in anticipation of a potential economic soft landing.

As the data continues to unfold, both the housing and stock markets will closely monitor the Fed’s actions and rhetoric. While challenges persist, Powell’s testimony has offered a glimpse of light at the end of the tunnel, reigniting hopes for a more balanced and sustainable economic landscape in the months ahead.

Fed in No Rush to Cut Rates While Inflation Remains Elevated

Posted on by slightbourne@noblecapitalmarkets.com

The minutes from the Federal Reserve’s latest Federal Open Market Committee (FOMC) meeting reveal a cautious stance by policymakers toward lowering interest rates this year, despite growing evidence of cooling inflation. The minutes underscored the desire by Fed officials to see more definitive and sustainable proof that inflation is falling steadily back towards the Fed’s 2% target before they are ready to start cutting rates. This patient approach stands in contrast to market expectations earlier in 2024 that rate cuts could begin as soon as March.

The deliberations detailed in the minutes point to several key insights into the Fed’s current thinking. Officials noted they have likely finished raising the federal funds rate as part of the current tightening cycle, with the rate now in a range of 4.5-4.75% after starting 2022 near zero. However, they emphasized they are in no rush to start cutting rates, wanting greater confidence first that disinflation trends will persist. Members cited the risks of easing policy too quickly if inflation fails to keep slowing.

The minutes revealed Fed officials’ desire to cautiously assess upcoming inflation data to judge whether the recent downward trajectory is sustainable and not just driven by temporary factors. This patient approach comes despite recent encouraging reports of inflation slowing. The latest CPI and PPI reports actually came in above expectations, challenging hopes of more decisively decelerating price increases.

Officials also noted the economy remains resilient with a strong job market. This provides the ability to take a patient stance toward rate cuts rather than acting preemptively. How to manage the Fed’s $8 trillion balance sheet was also discussed, but details were light, with further debate expected at upcoming meetings.

Moreover, policymakers stressed ongoing unease over still elevated inflation and the harm it causes households, especially more vulnerable groups. This reinforced their cautious posture of needing solid evidence of controlled inflation before charting a policy shift.

In response to the minutes, markets have significantly pushed back expectations for the Fed’s rate cut timeline. Traders are now pricing in cuts starting in June rather than March, with the overall pace of 2024 cuts slowing. The minutes align with recent comments from Fed Chair Jerome Powell emphasizing the need for sustained proof that inflationary pressures are abating before rate reductions can begin.

The minutes highlight the tricky position the Fed faces in navigating policy uncertainty over how quickly inflation will decline even after aggressive 2023 rate hikes. Officials debated incoming data signals of potentially transitory inflation reductions versus risks of misjudging and overtightening policy. With the economy expanding solidly for now, the Fed has the leeway to be patient and avoid premature policy loosening. But further volatility in inflation readings could force difficult adjustments.

Looking ahead, markets will be hyper-focused on upcoming economic releases for evidence that could support a more decisive pivot in policy. Any signs of inflation slowing convincingly toward the Fed’s 2% goal could boost rate cut bets. Yet with labor markets and consumer demand still resilient, cooling inflation to the Fed’s satisfaction may take time. The minutes clearly signaled Fed officials will not be rushed into lowering rates until they are fully convinced price stability is sustainably taking hold. Their data-dependent approach points to a bumpy path ahead for markets.

Mortgage Rates Remain Elevated as Inflation Persists

Posted on by slightbourne@noblecapitalmarkets.com

Mortgage rates have climbed over the past year, hovering around 7% for a 30-year fixed rate mortgage. This is significantly higher than the 3% rates seen during the pandemic in 2021. Rates are being pushed higher by several key factors.

Inflation has been the main driver of increased borrowing costs. The consumer price index rose 7.5% in January 2024 compared to a year earlier. While this was down slightly from December, inflation remains stubbornly high. The Federal Reserve has been aggressively raising interest rates to combat inflation. This has directly led to higher mortgage rates.

As the Fed Funds rate has climbed from near zero to around 5%, mortgage rates have followed. Additional Fed rate hikes are expected this year as well, keeping upward pressure on mortgage rates. Though inflation eased slightly in January, it remains well above the Fed’s 2% target. The central bank has signaled they will maintain restrictive monetary policy until inflation is under control. This means mortgage rates are expected to remain elevated in the near term.

Another factor pushing rates higher is the winding down of the Fed’s bond buying program, known as quantitative easing. For the past two years, the Fed purchased Treasury bonds and mortgage-backed securities on a monthly basis. This helped keep rates low by increasing demand. With these purchases stopped, upward pressure builds on rates.

The yield on the 10-year Treasury note also influences mortgage rates. As this yield has climbed from 1.5% to around 4% over the past year, mortgage rates have moved higher as well. Investors demand greater returns on long-term bonds as inflation eats away at fixed income. This in turn pushes mortgage rates higher.

With mortgage rates elevated, the housing market is feeling the effects. Home sales have slowed significantly as higher rates reduce buyer affordability. Prices are also starting to moderate after rapid gains the past two years. Housing inventory is rising while buyer demand falls. This should bring more balance to the housing market after it overheated during the pandemic.

For potential homebuyers, elevated rates make purchasing more expensive. Compared to 3% rates last year, the monthly mortgage payment on a median priced home is around 60% higher at current 7% rates. This prices out many buyers, especially first-time homebuyers. Households looking to move up in home size also face much higher financing costs.

Those able to buy may shift to adjustable rate mortgages (ARMs) to get lower initial rates. But ARMs carry risk as rates can rise substantially after the fixed period. Lower priced homes and smaller mortgages are in greater demand. Refinancing has also dropped off sharply as existing homeowners already locked in historically low rates.

There is hope that mortgage rates could decline later this year if inflation continues easing. However, most experts expect rates to remain above 6% at least through 2024 until inflation is clearly curtailed. This will require the Fed to maintain their aggressive stance. For those able to buy at current rates, refinancing in the future is likely if rates fall. But higher rates look to be the reality for 2024.

New Inflation Data Shows Prices Still Rising, Clouding Path for Fed Rate Cuts

Posted on by slightbourne@noblecapitalmarkets.com

The latest inflation data released Tuesday shows consumer prices rose more than expected in January, defying forecasts for a faster slowdown. The Consumer Price Index (CPI) increased 0.3% over December and rose 3.1% over the last year, down slightly from December’s 3.4% pace but above economist predictions.

Core inflation, which excludes volatile food and energy costs, also came in hotter than anticipated at 0.4% month-over-month and 3.9% annually. Shelter prices were a major contributor, with the shelter index climbing 0.6% in January, accounting for over two-thirds of the overall monthly increase. On an annual basis, shelter costs rose 6%.

While used car and energy prices fell, persistent strength in housing and services indicates inflation remains entrenched in the economy. This could complicate the Federal Reserve’s plans to pivot to rate cuts this year after aggressively raising interest rates in 2023 to combat inflation.

Markets are currently pricing in potential Fed rate cuts beginning as early as May, with around five quarter-point decreases projected through end of 2024. However, Tuesday’s inflation data casts doubt on an imminent policy shift. Many Fed officials have signaled a more gradual approach, with only two or three cuts likely this year.

The hotter CPI print pushed stocks sharply lower in early trading, with the Dow Jones Industrial Average falling over 250 points. Meanwhile, Treasury yields surged higher on expectations for sustained Fed tightening.

Inflation-adjusted wages also fell 0.3% month-over-month when factoring in a decline in average workweek hours. While inflation may be peaking, price increases continue to erode household purchasing power.

Shelter costs present a tricky situation for policymakers. Rental and housing inflation tend to lag other price moves, meaning further gains are likely even if overall inflation slows. And shelter carries significant weighting in the Fed’s preferred core PCE index.

While annual PCE inflation has fallen below 4%, the six-month annualized rate remains near the Fed’s 2% target. Tuesday’s data provides a reality check that the battle against inflation is not yet won.

To tame housing inflation, the Fed may have to accept some economic pain in the form of job losses and supply chain stress. So far, the resilience of the labor market and strong consumer demand has kept the economy humming along.

But the cumulative impact of 2023’s aggressive tightening is still working its way through the economy. Eventually, restrictive policy normally triggers a recession as demand falls and unemployment rises.

The Fed is walking a tightrope, trying to curb price increases without severely damaging growth. But persistent inflationary pressures leave little room for a swift policy reversal.

Rate cuts later this year are still possible, but will depend on compelling evidence that core inflation is on a sustainable downward path toward the Fed’s 2% goal. Until shelter and services costs normalize, additional rate hikes can’t be ruled out.

Markets cling to hopes that falling goods prices and easing supply chain strains will open the door for Fed easing. But policymakers remain laser-focused on services inflation, particularly in housing.

Overall, the January inflation data signals the Fed’s inflation fight is far from over. While markets may yearn for rate cuts, persistent price pressures suggest a longer road ahead before policy can substantively turn dovish.

Fed Holds Rates Steady, Cools Expectations for Imminent Cuts

Posted on by slightbourne@noblecapitalmarkets.com

The Federal Reserve left interest rates unchanged on Wednesday following its January policy meeting, keeping the federal funds rate target range at 5.25-5.50%, the highest level since 2007. The decision came as expected, but Fed Chair Jerome Powell pushed back on market bets of rate cuts potentially starting as soon as March.

In the post-meeting statement, the Fed removed language about needing additional policy tightening, signaling a likely prolonged pause in rate hikes as it assesses the impact of its aggressive actions over the past year. However, officials emphasized they do not foresee cuts on the horizon until inflation shows “greater progress” moving back to the 2% goal sustainably.

Powell Caution on Rate Cuts

During his press conference, Powell aimed to temper expectations that rate cuts could begin in just a couple months. He stated March is “probably not the most likely case” for the start of easing, rather the “base case” is the Fed holds rates steady for an extended period to confirm inflation is solidly on a downward trajectory.

Markets have been pricing in rate cuts in 2024 based on recent data showing inflation cooling from 40-year highs last year. But the Fed wants to avoid undoing its progress prematurely. Powell said the central bank would need more consistent evidence on inflation, not just a few months of decent data.

Still Room for Soft Landing

The tone indicates the Fed believes there is room for a soft landing where inflation declines closer to target without triggering a recession. Powell cited solid economic growth, a strong job market near 50-year low unemployment, and six straight months of easing price pressures.

While risks remain, the Fed views risks to its dual mandate as balancing out rather than tilted to the downside. As long as the labor market and consumer spending hold up, a hard landing with severe growth contraction may be avoided.

Markets Catching Up to Fed’s Thinking

Markets initially expected interest rate cuts to start in early 2024 after the Fed’s blistering pace of hikes over the past year. But officials have been consistent that they need to keep policy restrictive for some time to ensure inflation’s retreat is lasting.

After the latest guidance reiterating this view, traders adjusted expectations for the timing of cuts. Futures now show around a coin flip chance of a small 25 basis point rate cut at the March FOMC meeting, compared to up to a 70% chance priced in earlier.

Overall the Fed is making clear that investors are too optimistic on the imminence of policy easing. The bar to cutting rates remains high while the economy expands moderately and inflation readings continue improving.

Normalizing Policy Ahead

Looking beyond immediate rate moves, the Fed is focused on plotting a course back to more normal policy over time. This likely entails holding rates around the current elevated range for much of 2024 to solidify inflation’s descent.

Then later this year or early 2025, the beginnings of rate cuts could materialize if justified by the data. The dot plot forecast shows Fed officials pencil in taking rates down to 4.5-4.75% by year’s end.

But Powell was adamant that lowering rates is not yet on the table. The Fed will need a lengthy period of inflation at or very close to its 2% goal before definitively shifting to an easing cycle.

In the meantime, officials are content to pause after their historic tightening campaign while still keeping rates restrictive enough to maintain control over prices. As Powell made clear, investors anxiously awaiting rate cuts will likely need to keep waiting a bit longer.

Homebuyers Get a Break as Mortgage Rates Hit 7-Month Low

Posted on by slightbourne@noblecapitalmarkets.com

Mortgage rates fell to their lowest level in seven months this past week, providing a glimmer of hope for homebuyers who have been sidelined by high borrowing costs.

The average rate on a 30-year fixed mortgage dropped to 6.60% according to Freddie Mac, down from a recent peak of nearly 8% in October 2023. While still high historically, the retreat back below 7% could draw more prospective homebuyers back into the market.

The dip in rates comes as the housing market is showing early signs of a potential turnaround after a dismal 2023. Home sales plunged nearly 18% last year as surging mortgage rates and stubbornly high prices made purchases unaffordable for many.

But January has seen some positive signals emerge. More homes are coming up for sale as sellers who waited out 2023 finally list their properties. Real estate brokerage Redfin reported a 9% annual increase in inventory in January, the first year-over-year gain since 2019.

At the same time, buyer demand is also perking back up with the improvement in affordability. Mortgage applications jumped 10% last week compared to the prior week according to the Mortgage Bankers Association. While purchase apps remain below year-ago levels, the turnaround suggests buyers are returning.

“If rates continue to ease, MBA is cautiously optimistic that home purchases will pick up in the coming months,” said Joel Kan, MBA’s Vice President of economic and industry forecasting.

The increase in supply and demand has some experts predicting the market may be primed for a rebound in the spring home shopping season. But whether the inventory can satisfy purchaser interest remains uncertain.

“As purchase demand continues to thaw, it will put more pressure on already depleted inventory for sale,” noted Freddie Mac Chief Economist Sam Khater.

Homebuilders have pulled back sharply on new construction as sales slowed over the past year. And many current owners are still hesitant to sell with mortgage rates on their existing homes likely much lower than what they could get today. That leaves the total number of homes available for sale still historically lean.

Nonetheless, agents are reporting more bidding wars again for the limited inventory available in some markets. While not at the frenzied pace of 2022, competition for the right homes is heating up. Experts say interested buyers may want to start making offers now before the selection gets picked over.

“I’m advising house hunters to start making offers now because the market feels pretty balanced,” said Heather Mahmood-Corley, a Redfin agent. “With activity picking up, I think prices will rise and bidding wars will become more common.”

The driver of the downturn in rates since late last year has been an overall cooling of inflation pressures. The Federal Reserve pushed the 30-year fixed mortgage above 7% for the first time in over 20 years with its aggressive interest rate hikes aimed at taming inflation.

But evidence is mounting that the Fed’s policy actions are having the desired effect. Consumer price increases have steadily moderated from 40-year highs last summer. The slower inflation has allowed the central bank to reduce the size of its rate hikes.

Markets now expect the Fed to lift its benchmark rate 0.25 percentage points at its next meeting, a smaller move compared to the 0.50 and 0.75 point hikes seen last year. The slower pace of increases has taken pressure off mortgage rates.

However, the Fed reiterated it plans to keep rates elevated for some time to ensure inflation continues easing. Most experts do not foresee the central bank cutting interest rates until 2024 at the earliest. That means mortgage rates likely won’t fall back to the ultra-low levels seen during the pandemic for years.

But for homebuyers who can manage the higher rates, the recent pullback provides some savings on monthly payments. On a $300,000 loan, the current average 30-year rate would mean about $140 less in the monthly mortgage bill versus the fall peak above 8%.

While housing affordability remains strained by historical standards, some buyers are jumping in now before rates potentially move higher again. People relocating or needing more space are finding ways to cope with the increased costs.

With some forecasts calling for home prices to edge lower in 2024, this year could provide an opportunity for buyers to get in after sitting out 2023’s rate surge. It may be a narrow window however. If demand accelerates faster than supply, the competition and price gains could return quickly.