Markets Anticipate More Dovish Fed Commentary Next Week
The combination of a strong GDP report, the 10-year Treasury bond decreasing from 4.300% to 4.000%, and the signs inflation may be leveling off (albeit slowly) served as tailwinds for the equity markets. The result is another winning week. Risk-taking has been reignited, with the “fear of missing out” pushing stocks up, even amidst the multiple headwinds circling the economy. We’re hopeful these animal spirits make their way into the real estate and lending markets. The dramatic rise in interest rates will likely keep investors waiting for either a further reduction in real estate prices or a bigger drop in interest rates. Banks remain both cautious and passive in pricing loans, given that risk-free rates will be near 4.000% next week.
We anticipate next week to be momentous with the Fed meeting mid-week and the release of the October employment report on Friday. The probability of .75 basis point increase in Fed Fund rates is over 80% and is the most likely outcome when the Fed convenes. The rip higher in the equities market as well as persistent inflation combined with less than awful corporate earnings will justify the Fed’s continued hike on rates. It is important to remember that the Fed will be moving the Fed Funds Rate up by yet another .75 basis points soon, and these are dramatic moves. The impact of these moves will not be immediate. It takes time for these rate hikes to make their way into the real economy. Experts believe the lag effect of these hikes is around 6 months. Financing costs for consumers and business owners have surged this year, from credit card financing charges to mortgage and auto payments, as well as business and corporate loans. The higher cost of financing will hurt demand as these costs are absorbed. Many fear that the Fed’s medicine of swiftly raising rates to cool inflation is worse than just living with inflation. We believe the Fed is correct in addressing the inflation problem, but that their pivot from inflation is transitory. Destroying demand through higher rates is a dangerous prescription and could lead to a financial accident.
Getting a read on interest rates is perplexing. Inflation is still way too high. The Fed’s preferred gauge of recession probability, the inversion of the 3-month to 10-year Treasury, inverted recently. This supports the notion the Fed has tightened enough and should take a wait-and-see viewpoint. I am certain real estate brokers and mortgage professionals would welcome a break from what has been a formidable marketplace.