Powell Delivers Halftime Report to Congress

June 24, 2022

Last Week in Review: Powell Delivers Halftime Report to Congress

This past week Federal Reserve Chair Jerome Powell delivered his semi-annual testimony to Congress on Capitol Hill. Let’s walk through what the Chair said and how the financial markets reacted as well.

“At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” said Fed Chair Powell.

Last Wednesday, Fed Chair Jerome Powell was on Capitol Hill as part of the Federal Reserve Act, where the Federal Reserve Board is to submit written reports on “the conduct of monetary policy and economic developments and prospects for the future.”

Aside from the prepared testimony, the question-and-answer session from Congress always provides sound bites that move the market.

After last week’s 0.75% rate hike, the Fed Chair was grilled on the state of the economy, inflation, and the rising threat of recession.

“It’s certainly a possibility, it’s not our intended outcome, but it’s certainly a possibility.” Federal Reserve Chair Jerome Powell on whether Fed rate hikes will tip the economy into a recession.

Hearing of a possible recession, slow consumer demand and lower inflation were not comforting words to the financial markets. So, it was not a surprise to see rates improve in response to these words.

The two-year Treasury yield, which moves in advance of Fed moves, has declined from 3.50% at the recent Fed Meeting to under 3.00%, suggesting the Treasury market doesn’t see the Fed hiking rates as much as they said for fears of a recession.

“There’s really not anything that we can do about oil prices. Inflation was high certainly before the war in Ukraine broke out.” Fed Chair Powell.

This line got a lot of press and is a reminder that the Fed can’t fix headline or energy-based inflation. The two outcomes that can affect oil prices are either more supply or less demand. Oil has declined from a closing high of $124 to $104 per barrel as we head into the weekend. Why? The threat of slower demand caused by rising recession fears. Falling oil prices brings lower headline inflation, which is also good for bonds and rates.

“Overall, it’s a slowing in the housing market, the increase in housing prices to slow pretty significantly.” Fed Chair Powell.

The Fed has said they wanted to remove some of the “froth” out of housing and it’s clear that this has happened. Home price growth had been running at nearly 20% year over year coming into spring but, the recent rise in mortgage rates has slowed that pace of appreciation. We should expect more normal growth rates going forward and possibly some price declines in the near-term. We may also see a continued increase in housing supply as “would be” sellers jump in for the fear of missing out. All of this would be healthy and welcome to the housing market.

Bottom line: Long-term rates might have peaked at the recent Fed Meeting just like they did back in 1994 when the Fed last hiked rates by .75%. With additional homes coming to the market and rates having crested, now is a wonderful time to explore owning real estate.

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