Mortgage Rates Vs. Fed, Fed Wins – Flawless Victory…
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February 12, 2023

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Last week, mortgage rates reached a five-month low, but quickly rose to the highest levels in more than a month this week. Although the recent strong jobs report served as a catalyst, there is more to the story. The story began in October when rates hit record highs, but began to recover back to lower levels due to moderating inflation reports in November and December. The financial markets were eagerly anticipating lower inflation, as interest rates had been waiting for a sign that the worst was over. By the end of 2022, the market was confident that the Fed would cut short-term rates, despite Fed members repeatedly stating that rates would remain at the ceiling for another year or two.

However, the recent jobs report caused the market to panic, leading traders to believe that the Fed Funds Rate would not be lower in September than it was in June. Fed Chair Powell’s informal Q&A reinforced these fears, as he stated that the jobs report may indicate persistent inflation, requiring higher interest rates for a longer period of time. The effect of these comments was a quick rise in longer-term rates, with mortgage rates following a similar trend. This could potentially harm the momentum in purchase mortgage demand, as the recent drop in rates brought prospective buyers off the sidelines.

This week’s market correction does not imply the next move in interest rates, as it depends on economic data. The upcoming Consumer Price Index (CPI) report, set to be released on Tuesday, will be a crucial indicator of inflation and could impact interest rates. If inflation is higher than expected, rates could move higher, but if inflation is lower, rates could recover.

It is important to be aware that economic data measured by government agencies may not align with individual perceptions of the economy. For instance, the Small Business Optimism report, also set to be released on Tuesday, could provide a different perspective on the economy. While the recent strong jobs report may be a cause for concern, it is essential to consider the various reports and their impact on interest rates.

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