Federal Reserve Being a Grinch

Welcome to another edition of Sunrise Economix, where I’m sharing the freshest updates from the housing market, peppered with exclusive insights and valuable information tailored just for you.

First, I want to wish everyone a very Merry Christmas and Happy Holidays. I hope you can find time this season to reflect on the blessings we each have and to find ways to give back to those less fortunate. 

Onto the financial news: On Thursday we saw the Federal Reserve (“the Fed”) cut their target rate by 0.25%. This is the rate that banks charge each other for overnight borrowing. We also received the important Personal Consumption Expenditures (PCE) inflation report that is the Fed’s favorite measure for inflation. 

First Heritage Loan Officer, Mike Ott, wrote an excellent analysis on the Fed rate cut. 

He gave us permission to include it here.

I wish I could say that I’m reaching out to share that there is cheer in the financial markets, and in particular to mortgage rates, but it’s quite the opposite.

Yesterday, the Federal Reserve held with expectations and lowered the federal funds rate another quarter percent. However, neither the stock market nor the bond market — where mortgage back securities are — took kindly to the move. 

The main reason was that the Fed’s dot plot of projections for where they see future rate cuts went from 3 to 4 expected in 2025 to possibly 1 to 2 cuts.

In addition to that, Chair Powell’s press conference sent a bunch of mixed messages to the public about the labor market and where the Fed sees inflation trending in 2025. Powell expressed a softness in the labor market, but also commented that inflation appears to be much stickier in the outlook compared to what they were thinking at prior meetings.  

So, the markets didn’t like the tone of this message and the dot plot as both the stock market and the bond market sold off. Big movements like this are often knee-jerk reactions by investors and I would expect that we see the markets find their direction after the dust settles, but activity will remain low as market participants take time off between the holidays. And low volume trading can present volatility. In this current environment, it is unlikely we have any improvement in rates in the near term.

Now, I don’t want this message to come across as being a total Grinch. Some economists are predicting that we see a correction coming in the market in the first quarter of next year and that might change the Fed’s tune and prompt further rate cuts. And some believe we are going to see more softness in the labor market and an uptick in unemployment in the new year. And yes, many are watching closely how the incoming administration’s policies may or may not impact the markets. All this remains to be seen.

PCE from November showed headline inflation increasing 0.1% and increased to 2.4% from 2.3% from last year. This was 0.1% less than the market expected. After stripping out volatile food and energy prices, the Core PCE rose 0.1% also. Yearly Core PCE remained at 2.8%, which was also better than market expectations.

Rates improved on this news which was welcome relief after the pain felt after the Fed meeting.

We also wanted to share an interview with Danielle DiMartino Booth, an economist and former Fed Insider. She has some excellent points on the Fed’s decision making, statistical anomalies, recessions, and expectations for the future. It is 43 minutes long, but well a watch if you have some time to relax during the holidays.