All Things in Moderation

Vital Statistics:

Stocks are lower this morning after the FOMC decision. Bonds and MBS are up small.

The Fed made no changes to policy, however the dot plot showed a faster path of interest rate hikes than previously forecast. You can see the comparison of March versus June below:

The big takeaway is that in March, it was looking like we wouldn’t see any hikes until 2024. Now it looks like we will see rates begin to rise in 2023.

Bonds initially reacted pretty negatively to the release, with the 10 year moving up to 1.59% and MBS trading down a point or so.

The Fed took up their projections for GDP growth this year from 6.5% to 7%, but the number that got everyone’s attention was the inflation forecast, which was taken up from 2.4% to 3.4%. Supply bottlenecks are believed to be driving the increase in inflation this year, which means that it will be a temporary phenomenon as inventories catch up to demand. In his press conference, Jerome Powell noted that longer-run inflationary expectations seem to be unchanged, which gives the bank comfort that price increases this year will revert back to normal. If longer-run inflationary expectations start to creep up, then the Fed will get more concerned.

Jerome Powell also addressed the labor market, and the fact that we have high unemployment while companies have lots of unfilled positions. He attributed it to workers having a fear of getting COVID, expanded unemployment insurance, and workers having to take care of sick family members. The labor market remains a mystery, but I think the punch line is that wages are going up, and that means inflation may more persistent than the Fed is thinking. As Keynes noted, wages are sticky – commodity prices are not.

Speaking of the labor market, initial jobless claims increased last week to 412,000. It seems like every business has a “help wanted” sign, but unemployment claims remain stubbornly high.

New home mortgage applications fell for the second straight month due to inventory constraints. They fell 9% compared to April, but also 6% from a year ago. Given that we were under lockdown a year ago, that is a surprising number. “Mortgage applications to purchase a new home decreased in May for the second straight month, while the average loan size, at $384,000, increased for the fourth consecutive month,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Loan balances continue to rise because of a larger share of sales in the higher end of the market, as well as increased sales prices from strong demand and elevated building material costs.” 

Filed under: Economy, Morning Report |