A Hawkish Pause
Last week witnessed a rollercoaster in the mortgage markets, thanks to some key economic data and a Federal Reserve (Fed) meeting. After having increased the federal funds rate significantly in past sessions, the Fed decided to pause and assess the impact.
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- As expected, the Fed hit the brakes on rate hikes. But wait, there's more! They hinted at 2 additional hikes beyond the pause. Fed giveth, Fed taketh away.
- Despite a shaky economic outlook and rising interest rates, homeownership rates continue to rise. Even in an uncertain economy, everybody still wants to own Boardwalk and Park Place.
- For the first time since 2012, the average U.S. homeowner with a mortgage has less equity in their home compared to the previous year. The sequel nobody asked for, "Honey, I Shrunk the Equity!"
- Fed Chair Jerome Powell sees potential for two more interest rate hikes this year. Sounds like my diet plan. Promising progress, but donuts are still inflating my waistline faster than I'd like.
- Inflation rose at a 4% annual rate in May, the lowest in 2 years. Like a bad sitcom, even when it's lower, it's still kind of painful to watch.
📊 Market Update
Last week witnessed a rollercoaster in the mortgage markets, thanks to some key economic data and a Federal Reserve (Fed) meeting. After having increased the federal funds rate significantly in past sessions, the Fed decided to pause and assess the impact. However, in a somewhat surprising move, officials hinted at a tighter monetary policy, forecasting two more minor rate hikes this year, implying that rates might stay high for a longer period than earlier predicted.
As measured by the Consumer Price Index (CPI), inflation saw a year-on-year increase of 4.0% in May, a decrease from the previous month, mainly due to a drop in energy prices. But when looking at the core CPI, which excludes the fluctuating food and energy components, the annual rate was 5.3% higher in May, way above the Fed's ideal target of 2.0% set in early 2021.
Retail sales, an important economic health indicator, grew moderately by 0.3% in May, contrary to the forecasted decline. Key sectors like restaurants, bars, and home improvement stores enjoyed a boost, especially with building materials and garden equipment sales rising sharply.
Higher for Longer
After a two-day deliberation, the Federal Reserve has chosen to keep interest rates unchanged. However, the central bank isn't putting away its hiking boots just yet, as it eyes two more ascents before we bid farewell to this year. This decision marks a pause from what would have been the 11th consecutive rate increase, as the Federal Open Market Committee (FOMC) reckons it's time to assess the impact of its previous monetary ten-step.
Looking into the FOMC's "dot plot," a tool that reflects rate expectations of individual committee members, we see the median expectation for the funds rate touching 5.6% by 2023's end. However, as opinions vary at a family dinner table, so do they in the FOMC. Projections range from expecting no hikes this year to some members predicting up to four. The forecast also throws light on the future, anticipating a fed funds rate of 4.6% in 2024 and 3.4% in 2025, up from 4.3% and 3.1%, respectively, in the previous estimate.
If things go as planned, we might see the Fed trimming rates by an entire point in 2024, maintaining the long-term expectation for the Fed funds rate at 2.5%.
The FOMC members have upped their economic growth expectations for 2023, anticipating a 1% leap in GDP from the previous 0.4% estimate. There's also a silver lining on the unemployment front: a predicted year-end rate of 4.1%, an optimistic shift from March's 4.5% estimate. On the inflation front, the team has raised its projection for core inflation (minus food and energy) to 3.9% and slightly lowered its headline inflation prediction to 3.2%.
In light of the Federal Reserve's pause on rate hikes, successfully navigating the path ahead requires one to remain nimble. The possibility of two more hikes this year and shifts in economic predictions could easily throw a curve ball at the market. We'll be keeping a close eye on the Fed's next move and will keep you updated on any developments.
🗓️ Economic Calendar
A curated list of major events happening this week that can move markets.
Tuesday
- Housing Starts - measures the change in the annualized number of new residential buildings that began construction during the reported month.
Wesnesday
- Fed Chair Powell Testifies- when this man speaks, the markets listen.
Thursday
- Initial Jobless Claims - measures the number of individuals who filed for unemployment insurance for the first time during the past week.
- Existing Home Sales - measures the change in the annualized number of existing residential buildings that were sold during the previous month.