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CPI High, Rates Sigh

May 13, 2022

Last Weeki In Review: CPI High, Rates Sigh

This past week, home loan rates bounced around in a volatile fashion in response to more of the same…Fed speaks, inflation readings, and uncertainty. Let’s walk through what happened and discuss what to look for in the week ahead.

“Although the task is difficult, it is not insurmountable. We have the tools to return balance to the economy and restore price stability, and we are committed to using them,” New York Fed President, John Williams.

One week after the first .50% rate hike in 22 years, there were many Fed officials out using soothing rhetoric in an attempt to reassure financial markets they will be able to lower inflation while maintaining economic growth. Fed rate hikes and balance sheet reduction are intended to help slow consumer demand and there is now a growing fear the Fed will “overcook” the rate hikes and slow the US economy into a recession.

Stocks are sharply lower in 2022 and one of the main drivers is fear of a sustained economic slowdown. If the economy slows down, consumer demand will slow and that would likely lead to lower long-term rates, like mortgages. Bond yields or rates may already be giving us a sense that long-term rates may be close to peaking. The 10-yr Note backed well off its Monday high of 3.20% to reach 2.82% by midweek.

Inflation Has Not Yet Peaked

The April Consumer Price Index (CPI) was reported on Wednesday, and it was a bad surprise. The headline CPI, which includes food and energy prices, came in at a scorching 8.1% year over year. This, despite seeing an energy pullback in April. Energy prices have since moved higher, with diesel hitting all-time highs, so we should expect May’s headline CPI print to remain higher than we would like.

The big disappointment was the higher-than-expected Core CPI, which removes energy and food. This month-over-month reading came in at a blistering 0.6% to bring the year-over-year reading to 6.2%, more than three times hotter than the Fed’s target of 2% over the longer term.

“There are things we can do and we can address. That starts with the Federal Reserve, which plays a primary role in fighting inflation” President Biden.

President Biden reaffirmed the Fed’s mandate of maintaining price stability or inflation. The challenge for the Fed? The Fed tightens monetary conditions and slows down demand by hiking rates. These rate hikes will not do much, if anything, to help lower energy and food costs. With energy being a component in many goods and services, we should expect headline inflation to remain stubbornly high for some time.

A Long-Term Trend Remains Our Friend

For those considering a home purchase and worrying about rising rates, there is a positive trend to consider.

Over the last 40 years, every time the Fed hiked rates the 10-yr Note yield never reached the peak from the previous hiking cycle. The 10-yr Note hit 3.20% this past Monday and the previous peak was 3.25% – the last time the Fed hiked rates in 2018. Could we have hit a rate peak this week? Time will tell.

Bottom line: Home loan rates remain on a trend higher. Uncertainty and volatility around inflation, the Fed, and economic growth will continue to push rates and stocks around. If you are considering a purchase transaction, now is a great time to lock.

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