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Fed’s actions are meant to tame inflation
While noting the Fed’s actions appear to be yielding results in curbing inflation, she was taken aback the central bank didn’t allow for the traditional six-month period between rate hikes to test its impact on the market as it historically has done.
Instead: “The Fed raised rates seven times last year in an effort to squash inflation, but never waited for that timeframe to happen,” she said. “It just kept raising rates at each meeting. As a result, we are now watching an economy that’s grappling in a much higher rate environment. We are seeing that inflation is moderating and we also see signs of weakening in the economy.”
But she reverts to her “bad news for the economy is good news for bond yields” mantra to explain the positive impact on mortgage rates. “The mortgage rates are not tied to the bond market,” she reiterated. “And the bond market is basically reacting to economic data to project where they think the markets are going. Bond yields since November have dropped by almost a full percentage point, and mortgage rates have dropped along with that.”
The knee bone is connected to the thigh bone…
Think of it like bone linkages: “The connection is sort of like the knee bone is connected to the thigh bone kind of thing, where the inflation rate is attached to the bond yields which are attached to mortgage rates,” she said. “So as inflation comes down, bond yields come down and mortgage rates come down.”
That sets the stage for a new narrative – a time to bring out the figurative popcorn to watch how it all might unfold: “This year, we will see the direction of rates based on where the bond market goes,” Cohn said. “If we continue to get weaker economic data, if we continue to see the rate of inflation is being reduced on a monthly basis, mortgage rates will continue to come down.”
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