Per the Federal Reserve Chair Jerome Powell a week ago in his speech at the Jackson Hole Economic Forum “The Fed will push rates higher, and for longer. Will not reverse too early” and “Some pain will have to be endured”.
Key takeaways:
- Mortgage rates dropped from their highs mid-June over 1% to around 5.0%, but started going back up at the beginning of August, so in a month they’re back up to 6.25%.
- Prior to the speech, the financial markets were reacting like the Fed was seeing inflation dropping and was going to reverse its aggressive stance sooner rather than later. Powell emphasized that inflation is a bigger problem than a recession, and the Fed was going to raise rates substantially higher than neutral (the present 2.25-2.5%), and not back off even when his 2% inflation target is hit. He wants to make sure inflation doesn’t pop back up like it did in the 1970s. Can’t have inflation entrenched in the economy, and affect business decisions.
- Present Fed Funds target is 3.75-4.0%
- Quantitative Tightening – Starting in September the Fed is cutting back $95B per month of the $9T in bonds and mortgage backed securities on their spreadsheet. That’s double the amount they’ve been liquidating per month since they started the process in April. i.e. puts more bond supply in the system, pushing rates higher
- Employment is still out of balance. Powell’s eluding fewer job openings and layoffs to be expected, and healthier for the economy over the long run.
- Need to avoid a Wage-Price Spiral – The cause-and-effect relationship between rising wages and rising prices, or inflation. Rising prices increase demand for higher wages, which leads to higher production costs and further upward pressure on prices creating a spiral.
- We’re paying the price of having too much fiscal and monetary stimulus, for too long.
- Next Fed FOMC meeting 9/21/2022. Expect another .75% increase in the Fed Funds Rate. May be .5%, but per the speech, sounds like they’ll maintain the aggressive stance.
It’s a high probability we’ll see 30 year mortgage rates in the 6% range for a while. At a point when it’s perceived by the markets that a recession is taking hold, the long bond rates (including mortgages) will back off. IMO We’ll see 30 year rates back in the 4’s by the end of 2023.
If you are in the Los Angeles area and have any questions or real estate sales or financing needs, feel free in contacting me
Ron Henderson GRI, SRES, SFR, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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