A very weak jobs report surfaced today, making a rate cut this month a certainty.
Here are a few interesting observations.
I. Rates Hit An 11-Month Low; “Spreads” Are Lower Too – Woohoo!
The average mortgage rate is 6.29% today, per rate surveys. It is a low we have not seen since October of last year.
Here’s what’s interesting, though. When mortgage rates were this low last time, the 10-Year Treasury Yield was about 3.85% – while today’s yield is around 4.07% (as I type this blog).
Average mortgage rates are lower today relative to 10-Year Treasury Yields because the “spread” between the two has tightened this year, as demand for mortgage-backed securities has increased relative to the supply.
The spread remains above historical averages, though, so we can probably expect a further tightening (and even lower rates).
II. Employment Market Reality
Poor Danielle DiMartino Booth and Barry Habib. Both have been screaming at the moon for the last few years about the government’s far too rosy jobs reports, which rely far too much on estimates and weak data.
Both have been pointing to private sector data over and over and making the case that the labor market has been much weaker than we were being led to believe.
This has been a huge problem because it was the strong jobs reports more than anything else that were keeping rates elevated – and preventing the Fed from cutting.
(Remember that it was a crazy strong jobs report in October of last year that sent rates soaring higher, shutting off September’s purchase and refi boomlet like a spigot)
Think of the damage that did to both the real estate and mortgage industries.
Anyway – we are now seeing more accurate employment reports, Booth and Habib have been vindicated, and we can likely expect more downward revisions.
III. Will Lower Rates Spark Inflation – And Higher Rates All Over Again?
I don’t think so.
A. The money supply has been growing again (there is fear porn all over X, showing M2 growth), but economist Steve Hanke reminds us that M2 needs to grow just to support economic growth, but it is not growing fast enough to spark inflation.
B. “Truflation” shows that inflation is under 2% (the Fed’s magic number) now, as this post on X reminds us. The poster (Anthony Pompliano) also says it indicates the Fed should have cut much sooner.
C. Economist Lacy Hunt thinks the tariffs will do real damage too, sucking money/liquidity out of the system (and causing much more dangerous “DEFLATION” – which stagnates the economy) so rate cuts are very necessary to offset this concern.
NOTE: I suspect that Mr. Trump’s Treasury Secretary is well aware of this, and this is a reason why he wants lower rates too, over and above a desire to make government debt less expensive, to stimulate the economy, and to bail out commercial real estate investors (who desperately need lower rates to survive).
Note: Analyst Jim Bianco still thinks inflation is a risk, following rate cuts, and he makes a strong case. I recommend following him to see his case.
IV. Do Rate Cuts Work – Or Are They Like Granny From The Beverly Hillbillies?
In the 1960s sitcom, The Beverly Hillbillies, Granny had a cure for the common cold. You simply had to imbibe her horrible-tasting medicine, and then get plenty of fluids and rest – and sure enough, within a week to ten days, you were cured!
That is not unlike rate cuts. The Fed always cuts in response to weak economic conditions and then takes full credit for saving the day when the economy improves (just like Granny did).
But free economies invariably improve on their own, and, more importantly, rates FALL on their own when economies weaken.
So, yes, the economy will improve, but it will be less due to the Fed’s actions than to the economy simply doing what economies do.
And even worse, when the Fed does too much, e.g. bailouts or too low of rates, they create many other problems, including inflation, asset bubbles, wealth inequality, and below-trend economic growth rates (topics for a future blog).
TLDR: I will not be surprised at all to see rates 1/2% LOWER by year-end.
