Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Biden’s green energy policies (limiting supply) caused a tremendous surge in energy prices and food prices (one has to pay to get food shipped!). But in order for The Fed to cool inflation, they are in the process of tightening their loose monetary policy since late 2008.
One of the consequences (intended or unintended) is that as mortgage rose, homebuyer mortgage payments rose 45.5% YoY.
As expected, The Federal Reserve raise their target rate by 75 basis points today. While that sounds like an inflation (blue line)-crushing rate hike, look at the slowly shrinking Fed Balance Sheet (gold line).
Of course, the risk of a recession (dark blue line) is on the increase.
Given the increasing likelihood of a recession, The FOMC’s Dots Project shows The Fed’s target rate increasing to 4.625% in 2023, then gradually declining to 2.5% in the long run.
Fed Funds Futures data points to a peak in May 2023.
And with The Fed’s tighten-up, Bankrate’s 30yr mortgage rate rose to 6.38%.
Why is The Fed so slow to reduce its prodigious balance sheet if they REALLY wanted to fight inflation? So we can’t really say that The Fed has been turned loose to fight inflation.
As people are painfully aware, The Federal Reserve is on a mission … to hike interest rates to tame inflation back to 2%.
So, we saw a small surge in mortgage applications last week as the expectations of Fed rate hikes sinks in and households try to lock in mortgage rates.
Mortgage applications increased 3.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 16, 2022. Last week’s results include an adjustment for the Labor Day holiday.
The Refinance Index increased 10 percent from the previous week and was 83 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 11 percent compared with the previous week and was 30 percent lower than the same week one year ago.
At least the percentage of ARMs remained the same, 9.1%.
The Federal Reserve has a line on you! Or noose.
By the way, the theme song for the US version of the TV show “The Office” was written by Jay Ferguson, the primary singer for the ’60s band Spirit (that performed “I’ve Got A Line On You!”).
Here is Jay Ferguson singing the Spirit song “Fresh Garbage.” A fitting song for The Federal Reserve. Fed Garbage??
Today will be another Fed rate hike, expected to be a whopping 75 basis points. The S&P 500 tends to rally (green line) after the FOMC announcement. What will happen today?
The US is short on housing stock and remains short in August. While housing starts in August seems fantastic (12.8% MoM), the YoY growth in housing supply is down -0.1% as mortgage rates soar and The Fed removes monetary stimulus.
On a month-over-month (MoM) basis, 1-unit (single family detached) were up only 3.43% in August. 5+ unit (multifamly) starts were up 28.57% in August.
Since the Biden Administration has allowed over 2 million illegal to flow across the southern border, apartment space is in high demand.
According to RentCafe, the hottest rental markets in the USA are Miami, Orlando, SW Florida and … Harrisburg PA (the temporary home of uber-leftist PA Lt Governor John Fetterman). Perhaps Fetterman is letting illegal immigrants stay in his Harrisburg mansion, unlike President Obama on Martha’s Vineyard.
Why isn’t Biden letting illegal immigrants stay in his massive summer mansion in Reboboth Beach, DL?
C’mon man!
Even Obama’s economic advisor, Larry Summers, is wondering why Biden won’t allow pipelines to be build to reduce energy prices and reduce inflation.
Having said that, US mortgage rates are now the highest since 2008 and continue to rise with the expectation of more Fed rate hikes this year. Even core inflation is on the rise motivating The Fed to do more tightening since they aren’t receiving any help from Biden on energy or Congress in terms of massive spending of our money.
Mortgage payments for a median existing home in the US is back to the mid-1980s.
Data from Fed Funds futures implies that The Fed will raise their target rate to 4.50% by March 2023, then slowly lower rates.
Futures are down with the prospect of a 75 basis point bump in rates tomorrow. The Dow Jone Mini is down -167 points.
The National Association of Home Builders market index fell more than expected in September to 46, the lowest reading since 2012 (if I exclude the Covid economic shutdown).
Note that the NAHB market index is declining along with at the increase in the 30yr mortgage rate.
Inflation is stubborn because “goin’ green!” by 1) restricting US fossil fuel production and exploration and 2) Biden/Congress endless spending splurge since Covid. So, The Federal Reserve has a tough problem: cooling inflation while US energy prices are up 54% under Biden. And those higher energy prices have percolated through the entire economy in terms of food prices and heating prices.
Where do we sit? The US Treasury 10yr-2yr yield curve remains inverted (a sign of impending recession). Mortgage rates are the highest in 14 years as The Fed tightens.
If we look at Fed Funds Futures data, we can see that traders expect The Fed’s target rate to rise to 4.395% by March 2023’s FOMC meeting. Then traders expect The Fed to take their enormous foot off the tightening pedal.
Yes, inflation is crushing the middle class and low-wage workers. Average hourly earnings YoY after we subtract inflation are negative.
Taylor Rule? Currently, the Taylor Rule based on Core inflation of 4.56% YoY suggests a Fed target rate of 9.14%. Since traders anticipate the target rate to peak at 4.395%, The Fed will almost be halfway towards cooling inflation.
The problem is … Fed Chair Powell and Treasury Secretary Yellen don’t like rules limiting their “power.” Powell and Yellen think the Taylor Rule is a New Jersey ham product.
As inflation rages thanks to Biden’s energy policies and insane Federal spending, The Federal Reserve is trying to cool inflation (or Bidenflation).
As The Fed tightens, the 30-year mortgage rate has risen to 14 year highs. And home prices are still hot, hot, hot (though slowing). But consumer sentiment for housing remains in the doldrums (UMich Buying Conditions For Houses).
The good news? Atlanta Fed’s GDPNow real-time GDP tracker shows the US economy at positive growth of 0.521%. Ok, that is kind of lousy given the massive Fed stimulus and Federal spending since Covid.
M2 money velocity demonstrates the lousy return of Fed/Federal government “investment”.Near the lowest level in US history.
So, The Fed will have to destroy the US economy to save us from Bidenflation (bad energy policies and out-of-control Federal spending).
And more good news! The NASDAQ composite index is down only -1% today!
Raging US inflation is resulting in Federal Reserve monetary tightening, causing the 30-year US mortgage rate to hit it highest level since November 2008 (the beginning of Fed Quantitative Easing). Bankrate’s 30-year mortgage rate just hit 6.28%, the highest rate in 14 years.
The Biden Administration will be remembered for crippling inflation, the highest in 40 years AND the highest mortgage rate in 14 years.
And with Fed chatter about hiking rates, Dr T (me) predicts pain for the mortgage market.
US mortgage applications dropped to the lowest level since 1997. I wonder if President Biden will invite boring crooner James Taylor back to the White House to sing about the collapsing mortgage market? Perhaps he can sing “Shower The People” and change the lyrics to “Shower ON The People.”
Mortgage applications decreased 1.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 9, 2022. This week’s results include an adjustment for the observance of Labor Day.
The Refinance Index decreased 4 percent from the previous week and was 83 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 0.2 percent from one week earlier. The unadjusted Purchase Index decreased 12 percent compared with the previous week and was 29 percent lower than the same week one year ago.
The Bankrate 30-year mortgage rate is now at the highest level since 2008 at the advent of Fed’s QE.
Yes, The Fed has been slow as a sloth in shrinking its balance sheet.
Confounded Interest - Anthony B. Sanders 
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