Inflation vs Growth

 

Jason: Hello, everyone, and welcome back to the Mortgage Rundown. Today, we’re going to talk about the Federal Reserve.

If you haven't seen it by now, yesterday the Fed released their minutes from the last FOMC meeting. What we saw in the minutes this time was a divided FOMC where some are concerned about inflation and some are worried about risks to growth. And there's this battle going on between the two where we're seeing rates start to move up and rates start to move back down.

A lot of people are asking questions in terms of it looks like rates are going down and are they? Well, if you look at the graph on your screen, you'll see the 10-year Treasury. And very clearly in the most recent 30 days, we're seeing rates trend down, almost lower than they've been in the last four months.

Well, let me show you another graph. This is the two-year Treasury. And if you look at the two-year Treasury, it's actually been going up. Now we see a little bit of a dip in the last week or two. But by and large, over the last four to six months, short-term rates are going up.

Now, mortgage rates really haven't moved at all. So, here's a graph on your screen of mortgage rates. So, we're really not seeing mortgage rates move, but we're seeing the short term of rates going up and the short-term rates really are reflected by what's happening or what the Fed's going to be doing. And when you see short-term rates going up, that means the market's expecting that the Fed's going to be raising rates pretty soon.

When you see long-term rates going down like we saw in the graph of the 10 year that means there's risks or the market's perception of risk that long-term growth isn't going to be as high as we think it is.

And so, how do they deal with inflation right now? They really can't do a lot and they're really afraid to do anything. And so, one of the things they're talking about, one of the important parts of this, the minutes released that that just came out yesterday was they're thinking about tapering MBS purchases. And what that means is they don't want MBS or mortgage rates to be as low as they are because those low rates are driving home prices up. They're driving rent up.

So, the Fed by their own doing is causing inflation to go up in a more permanent way. We've heard them talk about inflation being very transitory or very temporary. Well, these are some things that are moving up and are very permanent.

I would say there is some fear that mortgage rates might go up and not tomorrow, not next week, but probably in the fall. And so that's something we really want to take from the minutes. Alright everyone that's it this week from the capital markets desk. Thank you all for watching and have a great day.