Fed Committed To Fighting Inflation With .75 BP Rate Hike…Expect More To Come.
“Don’t fight the Fed” was last week’s theme. Until recently, many of us failed to understand that this statement is tantamount to their management over both easing and tightening cycles. As stated previously, the Fed’s primary concern is inflation. Their policy decisions will be centered around curbing inflation. Should housing, crypto, or equities continue to get crushed, the Fed will not intervene. The great washout has begun. The Fed is reducing liquidity from the markets by raising short-term interest rates and letting bonds run off their balance sheet. In many ways, the equity market is doing a lot of the Fed’s work. As many equities are down from anywhere between 20% to 80%, we can’t help but feel poorer and less eager to spend. This sentiment will make its way through the economy, and eventually help to bring costs down. This includes costs of goods and services, as well as wages, all of which constitute a large business expense for companies.
Adding Salt To The Inflation Wound: Rates & Real Estate
Mortgage rates are back to 2008 levels. Housing starts are down dramatically. Consumer business confidence is miserable. The pain load placed on our investments is all part of the plan to crush inflation. It is disappointing that the Fed and Treasury placed their bets on inflation being transitory. Much of this destruction could have been avoided by slowly removing extra-accommodative policies from the financial system last year. Now, we face a very turbulent financial period. All this amidst having just a glimpse of a return to normalcy after experiencing a once-in-a-century pandemic. Ouch.
Part of me never thought we would see 6.00% 30-year fixed mortgage rates again in my lifetime. Yet higher rates are upon us. Housing prices have to adjust in the face of higher rates. Mathematically, you cannot have a doubling of interest rates without an adjustment to home values or cap rates on commercial properties. It will take some time for the market to adjust, but there will be an adjustment. Banks are also tightening credit standards as the fear of a recession increases. Personally, I think we are already in a recession. I don’t believe the recession will be too severe, given the strong balance sheets of businesses and a tight labor market. However, the Fed is committed to slowing the economy down and they will probably succeed.
Interest-only loans adjustable rate mortgages (ARM’s) will become much more popular with home buyers, especially with the elevated mortgage rates. It seems fairly certain that short-term rates will come back down if inflation readings abate, but only after the Fed raises rates by as much as 300 bp in the next 12 months. Should the S&P fall by another 20% down to around 3,000, it is hard to imagine the Fed would continue the tightening cycle. Those taking short-term ARM”s may benefit from falling rates a couple of years from now.