The Fed held rates steady yesterday, but mortgage rates fell – why?

    This is another reminder that the Fed only controls the very short-term (overnight) Fed Funds Rate (the rate banks charge each other to borrow); the Fed does not control long-term rates like the 10 Year Treasury or mortgage rates. In addition, our stock market is addicted to low rates like a heroin addict is addicted to heroin, so when stock investors learned they would not be getting more monetary heroin, they bailed from stocks and into bonds – and that too pushed rates down.

    What is fascinating about low-rate-addicted stock investors is that they seem to forget that when the Fed lowers rates, the stock market often crashes.

    Stocks of course do not crash because the Fed lowers rates; stocks crash because the market is responding to the same negative conditions that the Fed is responding to – and trying to “fix” with reductions in the Fed Funds Rate. So, if the Fed lowers rates, it will not be because the economy is strong, and inflation is in check; it will likely be because something is scaring the bejeebers out of the Fed.

    Rates Fell Again Today As Labor Market Cracks And Productivity Improves

    Rates fell again this morning in response to negative labor market news and positive productivity news. Initial and continuous jobless claims came in higher than expected today along with more layoff announcements from the likes of UPS (12,000), Salesforce (7,000), and Microsoft (3,000). Bond investors are of course very leery of all these numbers, as they understand that layoffs are always the final shoe to drop once we’re in a recession and this this could just be the beginning.

    Labor market productivity improved too – and that is huge! Productivity refers to the total amount of output relative to total hours worked – and it is something America is particularly adept at improving. It is extremely important because improved productivity is another indication that inflation will be tamed, as labor costs are a major component of inflation.

    Inflation Is At The Fed’s 2.0% Goal!

    Fed Chair Powell remains concerned about inflation, and that is one of the reasons they did not lower rates. BUT, as Barry Habib reminds us, inflation over the last 8 months has been running at 2.0% or less and it will likely fall further given that rents and owner’s equivalent rents are falling.

    Keep in mind too though that cumulative inflation since this all started is still well over 20%, and, as Kyle Bass reminds us on X, renters are really getting killed. So yes, inflation appears tamed, but the pain remains.

    BLS BS Coming Soon – Lock Today And Beware!

    Rates are much lower today, but rates never move in a straight line and tomorrow they’re likely to bounce higher again. This is because the Bureau of Labor Statistics (BLS) jobs report for January will surface tomorrow – and every report that surfaced over the last year has been way too rosy at first,  due to all kinds of nebulous statistical adjustments that never make sense or hold.  So, the BLS numbers almost always end up getting adjusted downward in later months.  The markets and the media, however, miss the downward adjustments and always overreact to the initial reports.

    As a result, many analysts expect another excessively rosy report to surface tomorrow.  And that is why we recommend locking in interest rates today.

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