Remember peeps, The Fed still have its staggering monetary stimulypto in place.
The Fed is signaling its withdrawal of stimulus, causing mortgage rates to soar.
Given the slowdown of the US and global economy, we shall see if The Fed keeps to its tightening plans. As of today, the market is expecting The Fed to raise its target rate from 1% to 3.819% by February 2023. That is a 291% increase in The Fed’s target rate.ng
The US Treasury 10Y-5Y yield curve has gone into negative territory (which usually occurs before a recession). At the same time, US mortgage rates are climbing like Tom Cruise in “Top Gun: Maverick” to 5.87% as The Fed tightens its choke hold on markets.
The 10Y-5Y Treasury curve typically goes negative before a recession.
And then we have today’s PPI report (Producer Price Index), rising 10.8% YoY as M2 Money stock starts to decline a bit.
Here is a better view of mortgage rates under Biden/Powell.
The Federal Reserve is making up for Bernanke and Yellen’s “too slow to remove” Fed stimulus policies (QE1 – QE3) and Powell’s Covid-related QE4. Now The Fed is trying to remove the stimulus in a (misguided) attempt to cool inflation. Remember, the dramatic rise in prices was caused by more than Fed stimulypto, it was also caused by Biden’s executive orders driving up oil, gasoline and natural gas prices and the massive Federal spending bills signed by Biden.
The result of The Fed’s jawboning about undoing Fed stimulypto is take away the punch bowl. But the results are troubling. Both the total return indices for US Treasuries and Agency Mortgage-backed Securities (MBS) have declined dramatically since inflation has been rising (highest in 40 years) and The Fed is expected to crank their target rate by February 2023 to 3.448% (The Fed Funds Target Rate currently stands at 1%). That is almost a 250 basis point rise in the target rate in 8 months.
While the 10-year rate is rising rapidly, the 2-year Treasury yield is REALLY rising fast.
And the yield curve (10Y-2Y) is down to +8.819 basis points as The Fed signals tightening.
And with rising 10 and 2Y Treasury yields, we are seeing the fastest rise in mortgage rates since 1981.
Here is my version of their chart since 2000 where you can seen the seismic shift in the balance sheet (toxic green slime line), particularly with The Fed’s response to Covid. The Fed is signaling a tightening in monetary policy to help reduce inflation (blue line).
But notice that M2 Money Velocity (GDP/M2) is now near the all-time low along with consumer purchasing power.
How BIG is The Fed’s balance sheet? Try more that a third of size of US GDP.
And as The Fed signals its inflation-fighting intentions, mortgage rates have shot up to 5.51%, the highest mortgage rate since June 2009.
President Biden met with Federal Reserve Chairman Powell to discuss how to control the inflation that is crushing the middle class and low-wage workers.
Here is a good example of why Biden is worried. There is a mid-term election on the horizon and people are angry and scared. Housing, generally the largest asset owned (or rented) by a household is simply unaffordable thanks, in part, to the over-stimulation of the economy by 1) The Federal Reserve in terms of money printing and 2) the Federal government in terms of fiscal stimulus in response to the Covid outbreak in March 2020.
In nominal terms, the gap between US home prices (Case-Shiller National Home Price Index YoY – US Average Hourly Earnings YoY) is near the all-time high.
Yes, home price growth exploded upwards when The Fed rapidly expanded their balance sheet in response to the Covid outbreak … and only now are considering shrinking the balance sheet.
In terms of house prices, CoreLogic has a nice chart depicted the odds of home prices dropping over the coming year. I circled Columbus Ohio because that is where I am moving (knock on wood).
And then we have the 30-year mortgage rate rising with The Fed’s expected tightening of monetary policy. That will certainly make housing even less affordable, unless house price growth cools dramatically.