The whole world’s praying for lower rates!
- Mr. Trump wants lower rates to stimulate the economy and to lower the deficit with lower interest costs.
- Mortgage lenders want lower rates for more refis and purchases.
- Real estate agents want lower rates to spur more purchases and listings (because sellers won’t feel locked into their current rate).
- Appraisers, title companies, stagers, and contractors want lower rates because they too get more business when purchase activity picks up.
- Homebuyers want lower rates to make housing more affordable.
- Commercial real estate investors desperately need lower rates to refinance their debt – to avoid losing properties.
- Private equity desperately needs lower rates – just to survive.
The stock market, tech companies, utilities, and any firms that rely heavily on debt financing are also desperate for lower rates.
So, why won’t Fed Chair Powell grant their wishes? And will it even work if the Fed lowers the Fed Funds Rate?
Barry Habib’s MBS Highway hit this beautifully today, and I am going to “borrow” the entire analysis.
1. “Too-Late-Powell”
Barry blames Mr. Powell for keeping rates way too low for too long after we pumped $5 trillion into the economy in response to COVID, as it was clearly inflationary. This inflation pushed up rates, punished consumers and darn near killed the mortgage industry. And now, Mr. Powell is too late in cutting rates.
2. Then Vs. Now
Barry shared an excellent chart (copied below), comparing the key criteria (unemployment and inflation) the Fed considers for rate cuts or increases. He compared the data now vs. when rates were cut three times last fall.
Unemployment was about the same, but labor market participation was actually higher, making unemployment effectively higher now. But, Powell cut last fall, but not now?
Inflation is actually showing clear signs of cooling, particularly on the CPI front. Powell actually cut in the face of rising inflation in December! But, yet Powell is telling us inflation is more of a concern now?
3. Why Didn’t Rates Fall Last Fall?
A. Inflation: Bond investors remained very concerned about inflation and believed the rate cuts might spur more inflation. So, when additional hot inflation reports surfaced after the rate cuts, rates shot up. But again, inflation is clearly cooler now.
B. Jobs Reports: The BLS released very strong jobs reports too which pushed rates up. But, all of those reports were revised downward and the data models are suspect, and Powell knows that.
4. Fed Funds vs. Mortgage Rates
Barry also makes the case that mortgage rates normally follow the Fed Funds Rate up and down, as indicated by the chart below. But, I might differ here a bit, as many analysts make the claim that the Fed just closely follows the market – with the Fed Funds Rate largely mirroring longer-term rates.
5. Powell Looking Ahead to Tariff Impact
Powell makes the claim that he is concerned about the future impact of tariffs on inflation. But, this is what really frustrates Barry because Powell normally only looks BACKWARD at data, and now he’s suddenly looking forward?
6. Labor Market Is Clearly Weaker!
This is what Barry and many analysts focus on the most. Job creations are way down, per ADP and other more accurate private sector reports. And, continuing unemployment claims are climbing.
Some analysts (like Jeff Snider) think the Fed will cut this month because of the weak labor market and because of indications they are seeing in the derivatives markets (that indicate investors expect economic weakness and lower rates).
Anyway, people are “hatin’ on” Powell because they think it is crazy that he is not cutting now, given that he cut in a stronger economy with hotter inflation last fall – and Barry thinks the Fed is 100 bps (1%) too restrictive.
