CHM Blog

No commitment, real consequences

A single speech in Wyoming just moved the odds of a rate hike in real time. Jake Krimmel, reporting for Realtor.com, breaks down what Kevin Warsh actually said at Jackson Hole, his first address as Fed chairman, and why the whole thing hinged on one carefully engineered contradiction.

Warsh doubled down on the Fed's 2% PCE inflation target, its preferred inflation gauge — on the idea that inflation has run too hot for too long, calling out 65 months of elevated readings as essentially a Fed-made problem. He also doubled down on the policy rate remaining the tool for fixing it. Then he made it clear he would refuse to commit to anything at all.

While this sounds contradictory on its face, he acknowledged the need to act while declining to promise action. Krimmel argues, however, that it's actually a deliberate strategy as well as a credible one. The real question hanging over markets now isn't whether the Fed raises rates. It's when.

Traders reacted instantly. Going into the speech, CME's FedWatch tool had priced in a 64% chance of a September hold. Fifteen minutes in, that dropped to 54%. By the time Warsh wrapped up, markets had flipped to pricing a 57% chance of an actual rate hike. If the goal was making a threat that traders would take seriously, it worked.

For housing, the near-term picture isn't encouraging, though Krimmel frames it as short-term pain in service of a longer-term fix. Warsh's underlying concern about inflation is legitimate, and it hits housing from multiple directions at once. Elevated inflation keeps mortgage rates higher for longer while simultaneously chipping away at real wages and income growth, a double blow that squeezes both housing demand and affordability at the same time. Add in the effect inflation has on building material costs, and the pressure compounds further.

Don't expect meaningful mortgage rate relief this fall, according to Krimmel. But there's a case for patience here: getting inflation under control sooner rather than later is what ultimately puts housing in a stronger position, both on rates and on real purchasing power, over the next 6 to 12 months and beyond.

Realtor, TBWS

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I'm among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Neutral

Mortgage rates are under pressure today. The MBS market improved by +11 bps last week. This was not enough to decrease mortgage rates or fees. The market experienced high volatility last week.

This Week's Rate Forecast: Neutral

These are the three things that have the greatest ability to impact rates this week. 1) Geopolitical, 2) Jobs and 3) ISMs.

1) Geopolitical: Last week, the mantra was moving from kinetic to economic warfare with Iran. But this week starts off with fresh military action in the Straight. Bonds will continue to be very sensitive to volatility in oil prices.

2) Jobs: The Fed says that the job sector is "stable". Is it? We will get a ton of job and wage related data all week, culminating in Big Jobs Friday. Prior revisions to the NFP will get a lot of attention as will Average Hourly Earnings and the Unemployment Rate.

3) ISMs: We will get ISM Manufacturing on Tuesday and Services on Thursday. Each contains key inflation (Prices Paid) and employment components.

This Week's Potential Volatility: High

This morning markets have started under pressure due to conflict escalation in the Middle East. Volatility has started at moderate to high levels and could easily become high later in the week.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

MLO of record MLO.100007700 / NMLS#233568 / CHM NMLS#127716.