Rates are Heading Higher: Now What?

January 17, 2022

We had another bad inflation report last week: consumer prices jumped 7% in December from a year ago. That was the eighth straight month of a figure higher than 5%, and the third consecutive month above 6%. It is the biggest annual increase since February 1982.


Orion’s brokers realize that the Federal Reserve does not set mortgage rates, but also know that the same factors influence its decision making AND mortgage rates. After listening to Fed officials over the past two weeks, it has become clear that the Fed is determined to hike the short-term rates it controls in March (primarily the overnight Fed Funds rate and the Discount Rate), regardless ofwhat the data may do between now and then.


Brokers who follow economic news, and forecasts, know that the market expectations seem to waffle between expecting three or four hikes this year (March, June, September, and perhaps December) and a balance sheet announcement at the May meeting. Obviously, the securities that the Federal Reserve has been buying (U.S. Treasury and mortgage-backed securities) pay off over time, and this “runoff” will increase the speed of its balance sheet reduction; perhaps the balance sheet would shrink by $50-$100 billion later in 2022.


The Fed has clearly come to the realization that it is behind the curve, and has a lot of catching up to do. Thus, risks are now skewed toward more tightening, aka, higher interest rates. Weak data are unlikely to provide much relief, while strong data should push the market to price even more hikes, albeit further out the curve rather than in 2022.


Inflation is in the headlines, and everywhere we turn. The higher the inflation rate, the more interest rates are likely to rise because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future. Put another way, if you, or a big money manager, is only earning 2 percent on your money, and the inflation rate is 7 percent, you’re losing money. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power would decrease. Thus, interest protects against future rises ininflation.


Orion and our brokers can’t change the economy, but we can change our tactics. And brokers are changing theirs. There are millions of homeowners out there with 2-3 percent fixed-rate mortgages but with huge amounts of equity that may need to be accessed. Are you, as a broker, able to change the conversation? Can the cash-out refinance options that Orion offers help your client? Talk to your Orion AE about ideas on helping your borrowers with their needs!

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