The Fed… Again

June 21, 2022

Mortgage rates have resumed the push higher that we saw in February, March, and April. Normally bad economic news, such as the pandemic’s impact on the U.S. economy, usually pushes interest rates down, but last week was an exception. It made no difference that the same poor news is pushing the stock market down. Several key pieces of economic data missed forecasts during the week, ranging from retail sales to housing starts. Orion’s clients want to know, “Why did interest rates, and mortgage rates in particular, go up?”


Our brokers know that the Federal Reserve raised its benchmark interest rate by 75 basis points, the most since 1994. By doing so “the Fed” showed investors that it is taking the threat of inflation seriously by intensifying its campaign against surging prices. Another 75-bps, or even a 50-bps move, is also likely for the meeting in July, according to Fed Chair Jerome Powell. Stocks initially climbed into the close in somewhat of a relief rally, but a bloodbath rocked Wall Street in the following session, with the Dow Jones tumbling below the key30,000 level for the first time since January 2021.


What does Mr. Powell have to say about it? "We don't seek to put people out ofwork," addressing the potential of a recession. So the central bank is not trying to induce a recession. "Of course, we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability. It's not going to be easy, and it may well depend, of course, on events that are not under our control."


The Fed’s hikes probably won't impact the supply side, which the Fed largely attributes to soaring gas and food costs. In terms of the stock market and retirement funds, things will largely depend on whether investors believe the Fed will be successful in pulling off a "soft landing," by stabilizing inflation without denting economic growth.


Although the rate moves don’t help Orion’s broker’s clients, some are actually encouraged by the rise in rates. They felt that we were ready to exit an artificial world of low rates, prompted by the Fed’s daily asset purchases, and the massive liquidity injections where everybody gets used to zero interest rates.


How will it affect your clients and others? We have already seen interest rates, as well as price appreciation, impact home affordability. Despite the largest rate hike in three decades, it will take some time for the higher borrowing costs to cool demand and make their way into the economy. Mortgage rates are expected to continue to go up, as well as car loans and credit cards, making it much more expensiveto borrow cash. That said, Orion has some great programs that will help ease the burden of higher rates for your clients. Just ask your AE.


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