A More Hawkish Tone

Jason: Hello, everyone. Welcome back to the Mortgage Rundown. Today we’re going to talk about what's happening in the capital markets.

This week we had the ever-important Federal Reserve meeting. Despite the record inflation that continues month after month, they did not raise interest rates, nor did they taper asset purchases any quicker.

They did, however, acknowledge that they expect to end asset purchases in March, according to the original plan, and somewhat implied they plan to raise interest rates at the next meeting, which is in March.

They did not, however, state a commitment to raise interest rates the next meeting. Thankfully, they acknowledged that inflation is running stubbornly above their target, largely due to the fact that the Coronavirus has lasted longer than expected and there has been more variant waves than expected, which is the biggest driver of inflation today, causing the supply chain disruptions.

The market is expecting the Fed to raise interest rates four times in 2022, but there is still no commitment from the Fed on their plan for 2022 other than to continue to monitor the labor market and prices and adjust accordingly.

Outside of the Fed, we are witnessing a sudden and severe drop in both the stock and bond markets as investors prepare for more volatility in 2022. The volatility is a function of high inflation, the uncertain economic outlook, and the presumption, but limited facts surrounding the Federal Reserve's actions this year.

Until we get to the March meeting, where hopefully the Fed takes some decisive action or at least supplies the market with more certain guidance, then I would expect volatility to continue.

Something to keep an eye on is the yield curve, a potentially interest rate rising environment with uncertainty surrounding growth could see short-term Treasury rates rising, while long-term Treasury rates remain relatively flat.

In fact, if you look at the chart on your screen, you will see that the 2-year Treasury is rising faster than the 10-year Treasury. This has put a lot of pressure on mortgage rates which have spiked up over the past couple of months.

That’s it everyone from the Capital Markets Desk this week. Thank you all for watching and have a great day.