Powell Showers the Bond Market with Love

July 19, 2021

Last Week in Review: Powell Showers the Bond Market with Love

This past week long-term interest rates spiked higher in response to a hotter-than-expected consumer inflation print only to come back down in response to soothing words from Federal Reserve Chairman Jerome Powell. Let us break down what happened and what to look for in the weeks ahead.

Consumer Prices Are Rising

The Consumer Price Index (CPI) for June showed inflation rising by 5.4% year-over-year, much hotter than expectations and the highest reading since 2008. Inflation is the arch-enemy to bonds and interest rates, so it was no surprise to see long-term Treasury and home loan rates spike higher.

This high reading came one day before Fed Chair Powell was set to speak in front of Congress in his semi-annual testimony on economic conditions and monetary policy.

Heading into the testimony, there was already growing pressure for the Fed to start tapering bond purchases, more specifically MBS purchases, because of inflation fears and froth in the housing market.

Before Mr. Powell took a seat in front of Congress, his prepared speech was released, and he made it very clear the Fed is not going to taper bond purchases just yet despite the higher inflation fears.

There Is Still a Long Way to Go

The Fed has a dual mandate of maintaining price stability (inflation) and to promote maximum employment. They are leaning on the employment side of the mandate when they are saying, There is still a long way to go. With over 9M job openings, the most ever in U.S. history, the Fed is correct. It will take some time to fill millions of jobs.

Mr. Powell also said the Fed is going to talk about tapering in the next couple of meetings. They meet again on July 27th and 28th with the next one in late September. This means the Fed is likely to hold the current course throughout the summer.

Bottom line: Interest rates are at the best levels seen since mid-February, making it a great opportunity to secure a home loan. For anyone considering a mortgage, now is the time.

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