If a mortgage banker had a time machine, would he:
1. Tell Franz Ferdinand to duck and prevent WWI?
2. Tell the Russians that that Lenin guy is not nearly as nice as he pretends to be?
3. Convince Hitler to skip politics and keep painting?
4. Convince Mao that starving 40 million people to death is not really a great leap forward?
5. Warn 1969 Jets fans that they will never see another good team?
6. Beg President Trump not to bomb Iran?
Duh. #6 obviously. Followed closely by #5, because we care.
I bring that up because this year’s rate increases continue to devastate a mortgage industry that had anticipated a banner year.
The desperate mortgage industry breathed a sigh of relief today as mortgage rates fell, partly in anticipation of a Fed rate hike.
The question is: Will we see the opposite of the fall of 2024 – when the Fed cut rates by 1% only to see long-term rates go up by 1%?
Logan Mohtashami says: don’t count on it in this post. The post includes a chart showing long-term rates climbing in conjunction with hikes in the short-term Fed Funds Rate.
In 2024, when the Fed cut rates, part of the reason rates rose at the same time was that the bond market saw the cuts as potentially inflationary.
But rates also rose at the same time in response to strong jobs numbers and hotter-than-expected inflation numbers.
So, yes, long-term rates can fall in response to a hike in the short-term Fed Funds Rate – like we are seeing already (because it is a signal to the markets that the Fed is “serious about fighting inflation”).
But – it may not last.
There are three big takeaways/reminders that I have shared more than a few times:
- The Bond Market controls long-term rates based on growth and inflation expectations – and that power often offsets anything the Fed does.
- Corollary to #1: The Fed only controls short-term rates and has much less control over long-term rates than most of the world thinks.
- The Fed often just follows the markets (as opposed to significantly influencing them), responding to the same data the bond market responds to.
Why Steve Forbes Hates the Idea of a Rate Hike
In this 5-minute podcast, poor Mr. Forbes repeats a message he’s been trying to drive home for 40 years: The Federal Reserve Must Not Hike Rates This Week—Here’s Why It Wouldn’t Help Fight Inflation At All.
His points: Increasing the cost of money (raising rates) does NOTHING to fend off inflation. It is a myth (that the Fed clings to) that raising rates and slowing down economic activity fights inflation (it just needlessly makes people poorer and the economy weaker).
Today’s inflation is caused mostly by the Iran war, and rate hikes will do nothing to bring those prices down.
The only way to fend off inflation is by protecting the value of the dollar – by focusing on the money supply or supply of dollars in the system.
