By Mark Sprague, State Director of Information Capital
The market had hoped that moderating inflation would have a positive impact on rates by the middle of this year. Not going to happen. Not happening for the rest of the year.
While inflation has shrunk / slowed, the interest rate environment has not cooperated, as any loan officer / realtor can tell you. With no points, the conforming 30 year fixed is now solidly entrenched above 7%. This, despite news that should have moved rates lower, such as the Federal Reserve’s favorite measure of inflation, Personal Consumption Expenditures hit 3.8 percent year-over-year and 0.1% month-over-month. This was great news to illustrate an improving inflation picture, but the bond market didn’t care, instead focusing on the red-hot labor market.
Did someone say labor? The Federal Reserve views increased joblessness as key to reducing inflation to their target rate of 2 percent but there are 10 million + job openings with only about 6 million people looking for work. (i.e. 6+ million unqualified / untrained.) Here in Texas consistently 3 times as many job opening as people out of work.
June’s non rate increase, what did it mean? Investors received some additional insight yesterday into the Fed’s thought process at the June Federal Open Market Committee meeting, when there was less consensus than the unanimous decision suggested in leaving rates unchanged. Some officials favored rate increases but went along with the move to leave policy unchanged, despite concerns that core inflation hasn’t moved downward much in the last six months.
Whatever the disagreement among Fed officials, it’s fair to say the key takeaway is that more hikes are coming, as almost all officials (Federal Reserve governors) said that additional increases would likely be appropriate. We did learn last week that Core PCE inflation is still running hot, but it did edge slightly lower to 4.6 percent year-over-year in May. The annual increase in the PCE Price Index ex-food and energy (the core rate) is the Fed’s most important inflation indicator and has gone back and forth between 4.6 percent and 4.7 percent this year. Personal spending did stall in the second quarter, which will be welcome news to the Fed.
So, are rates going up, yes, or no? As most of you know, yes, I have been right on rates the last 2 years……however there is the previous 5+ years that were less than kind…….expect rates to hike 25 basis points on July 26. (and another possibly in August or September.)
The worst thing clients can do presently is wait to see if rates dip.
If you have any questions / concerns let me know.