HeChairman Jerome Powell kept a hawkish tone during his speech at a news conference on Wednesday afternoon, but he was not aggressive enough to prevent optimism from spreading through markets as fell closer to 6%.
“Inflation remains well above our long-term target of 2% for the 12 months ending in December: total PCE prices increased 5%; excluding the volatile food and energy categories, prices were up 4.4%,” Powell told reporters.
“While recent developments are encouraging, we need much more evidence to be sure that inflation is on a sustained downward path,” he added.
According to Powell, Fed officials have decided to shift rate hikes to a slower pace to better gauge the progress of the economy. On Wednesday, the Federal Open Market Committee (FOMC) raised the federal funds rate byto the range of 4.50%-4.75%. However, the Committee also anticipates that continued increases in the target range will be appropriate to bring inflation back to 2%.
However, all the markets have heard is that disinflation is taking place, or in other words, inflation growth is slower. When the closing bell rang Wednesday, the S&P 500 was up 1.05% and the tech-heavy Nasdaq was up 2% compared to the previous close. The yield curve also fell, with the 10-year Treasury note down 13 basis points to 3.39%.
In turn, mortgage rates began a free fall. The last freddy mac The index measured the 30-year fixed-rate mortgage at 6.09% as of Thursday, down four basis points from the previous week. The rate was even lower in Daily Mortgage News, at 6.04% on Thursday, 13 basis points less than the previous close.
“Mortgage rates are back down, with the 30-year fixed rate down nearly a full point since November, when it peaked at just over 7%,”chief economist at Freddie Mac, said in a statement.
“According to Freddie Mac research, the 100 basis point reduction in mortgage rates since November may allow up to 3 million moreto qualify and repay a $400,000 loan, which is the average price of a home,” he added.
Is the market exaggerating?
The bond market is clearly not on board with Powell’s aggressive speech, according to Logan Mohtashami, principal analyst at housingwire.
“The market is correct as the inflation growth rate has been falling, and it looks like the Core PCE will be in control of 3% by the end of the year,” Mohtashami said. “Powell and the Fed have been talking tough for months, but the growth rate of inflation has been falling, even as the job market has held firm.”
Mohtashami expects spreads between the 10-year Treasury note and 30-year fixed-rate mortgages to improve further, with mortgage rates soon falling to the 5% level.
A Goldman Sachsthe analyst team said the February FOMC meeting sent a message that the disinflation process is already underway.
However, there is more work to be done as the Committee left unchanged the sentence in its statement that “continued” rate increases will be appropriate, “a modest aggressive surprise to our expectation that it would tone down this language,” they wrote. analysts. .
The Goldman Sachs team forecasts two more 25 basis point hikes in the federal funds rate in March and May. According to Sachs, “the FOMC aims to avoid recession but keep growth below trend to further smooth labor market conditions, in line with our forecast.”