Hello everyone. Welcome back to the Mortgage Rundown. Today we are going to talk about what’s happening with the Capital Markets.
Another month and another release of inflation data. Yesterday was the highly anticipated CPI report. Is inflation still running high or have the FOMC moves over the past year finally pushed inflation downwards?
Well yesterday we got some bad news and a little bit of good news. Inflation is still running well above the Fed’s target and on a year-over-year basis is still running at 5.5% when you exclude volatile food and energy prices. In fact, if you look at the chart on your screen you will see that annual inflation has come down from its peak in September, but the FOMC still has a long way to go to get it down to 3% or lower.
Just to summarize, the Fed has been raising interest rates since March of last year and we are now looking at a Fed funds rate that went from 0-0.25% to where it is now at 5-5.25%. Those increases have certainly put a cramp on the economy and it’s slowly working its way into the components of CPI. We are starting to see relief in airfare, hotel stays, new cars, and rent. But the job market remains very strong with unemployment at record lows, goods prices are still very high, and energy prices still remain elevated.
Inflation has spread throughout the entire economy and when it comes down it’s very uneven, and for certain sectors, returns to normal very slowly. We will have to continue to be patient, but it does appear that we are on the right track for it to come down over time.
Yesterday’s report seems to reinforce the belief that the FOMC will not raise rates in June and has reached their terminal rate. The market is pricing in a drop in the Fed Funds rate in September, November, and December. That might be an aggressive timeline given recent comments from the Fed, but clearly the market believes the economy is headed for a recession much sooner than the Fed. So far, the Fed has been right about the stickiness of inflation and the need to keep rates higher for longer.
That’s it everyone from the capital markets desk this week. Thank you all for watching and have a great day.