Hello, everyone. Welcome back to the Mortgage Rundown.
So today, we're going to talk about what's happening with interest rates. I'm sure by now most of you’ve heard that the FOMC raised interest rates 75 basis points this week. Their target overnight rate is now 1.5% to 1.75%. The market is pricing in almost a 75 basis point increase to rates at the meeting in July, as well as 50 basis points in September, 50 basis points in November and 25 basis points in December with the expected Fed funds rate to be over 3.5% by the end of the year.
Now, the reason the Fed is taking such an aggressive stance is that it appears inflation is still not under control. Rising prices are being felt everywhere with no seeming end in sight and the latest CPI figures showed annual inflation actually went up to 8.6% last month when the market was looking for it to go down slightly.
The Fed's preferred inflation measurement, PCE, actually did go down last month to 4.9%, but that movement was pretty small, and clearly the headline CPI number was a shock to the market that is still reeling with uncertainty.
Moving over to interest rates, the Treasury curve continues to rise rapidly with the ten-year getting closer and closer to 3.5%, which is a level we haven't seen since 2011.
The other thing to keep an eye on is the yield curve, which we typically associate with the spread between the two-year and ten-year treasury. That is close to a point of inversion where the two-year yield is higher than the ten-year yield.
The chart on your screen shows how close those two have come recently, and generally a prolonged inversion is the market telling us that a recession is likely imminent. Right now, that's not what the market is saying, but we need to keep a close eye on it.
The other issue with the flat or inverted yield curve is that generally fixed rates are priced better than adjustable rates. When longer-term Treasury rates are lower than shorter-term Treasury rates then mortgages typically follow, as we are seeing today.
That's it everyone from the Capital Markets Desk this week. Thank you all for watching and have a great day.