The Fed raised rates 75 basis points or 3/4% yesterday – so my rate quote at the bottom of this blog went from 6.0% yesterday to 6.75% today.
FALSE!! THAT DID NOT HAPPEN! My rate quote today is the same rate as yesterday’s even though the Fed “raised rates 3/4%” yesterday.
I typed the top line of my blog merely to illuminate the misconception all too many people have when it comes to the Fed’s rate increases.
I was on a speakers panel yesterday at a large Realtor (YPN) event and I heard at least a dozen people say “the Fed raised rates 3/4% today.” And worse, my Uber driver told me the same thing on my way home from the airport 😊.
So – I am going to address this again. The Fed only raised the “Fed Funds Rate” – which is an overnight (very short-term) rate that banks charge each other to borrow money (to meet various liquidity and reserve requirements).
Increases in the Fed Funds Rate do not always correspond with increases in long-term (mortgage) rates, depending on if the increases are seen as inflation fighting or as threats to economic growth, and also depending on the comments the Fed makes alongside the announced rate increases.
Yesterday was a great example of how the Fed’s comments sway the market. The Fed’s official “written” statement implied that the Fed would soon back off on rate increases – and both stock and bond prices shot up (as a reminder, when bonds are up, rates fall).
BUT – Fed Chair Powell later spoke and countermanded the written statement with much more “hawkish” comments that implied that he would continue to tighten (raise rates and sell assets) even if it meant “over-tightening.”
And Boy Did That Make Barry Habib Mad! (Fed Ignores The Lag Effect)
Barry Habib (of MBS Highway fame) is irritated because he, like many other macro pundits, believes that the Fed does not understand how it takes many months for us to see how monetary policy impacts the economy – and the tightening so far has been more than enough to kill off demand and fend of inflation (we simply have not given the economy enough time to show the results).
Deflation Coming Soon
Barry made his case behind a paywall (so I can’t share his video), but fortunately Joe Brown of Heresy Financial makes the same case that Barry did in this excellent 7-minute (at 2x speed) video.
Joe uses inflation, interest rate, and asset price data to clearly make his case.
He points out that asset (stocks and real estate) prices rise and fall soon after Fed policy changes; lower rates and asset purchases increase asset prices very quickly; and higher rates and asset sales decrease asset prices very quickly – like we saw this year.
Joe’s most important point is this: The impact on economic activity lags monetary policy changes by as much as a year.
So, we have not yet seen the full effect of the Fed’s rate increases – which is what Barry Habib pointed out today as well.
Joe further says that we are all but certain to see deflation soon with both wages and prices – which is exactly what Stephanie Pomboy was saying in a Wealthion podcast (which I blogged about in September here).
So yes, I too think the Fed is overtightening; I too think the economy is in for a bruising; and I too think rates will fall.
I might add that I am not sure when rates will fall, and I (and the pundits I follow) could be wrong.
Hence – I’d like to also share the comments a very well respected agent made yesterday to the group of agents I was speaking in front of: “it is extremely important to execute a strategy that will work for the market we are currently in” (and not wait for it to change).
And finally – our Business Development Officers are seeing what strategies are still working and are more than happy to share their findings.
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