Achy-Breaky Fed? US 30Yr Mortgage Rate Rises 31 Basis Points Over Last Week As Recession Probability Increases (How Will Fed Act?)

We have the achy-breaky Fed.

The Federal Reserve is facing an interesting problem. On the one hand, they vow to fight inflation by raising their target rate. At the same time, the probability of a recession in one year has grown to 50%.

Bankrate’s 30yr mortgage rate rose 31 basis points over the past week as 1) inflation probability increased and 2) Fed Funds Futures point to an O/N rate of 3.523% by the December FOMC meeting (up from 2.50% today). Growing recession probability typically results in Fed intervention and a lowering of rates while growing inflation typically results in Fed tightening. What’s The Fed to do??

Fed Funds Futures point to The Fed raising their target rate to 3.660 by March 2023, then loosening again.

Will The Fed sing “Let’s get started” when it comes to shrinking their balance sheet? Or will the go into “loose as a goose” mode again?

Will The Fed consider that Public Debt grew from $7.84 trillion at the peak of the previous housing bubble in June 2005 to a whopping $30.7 trillion in August 2022? That is a 290% growth in Federal government debt since June 2005. With The Fed fighting inflation, the 2yr Treasury yield is smoking, making it more expensive to fund Federal government operations.

At least The Fed is in for one helluva ride!