Interestrates continue to be a discussion topic among Orion’s brokers. Jobs and housing drive the economy in the United States, and the U.S. economy added a stronger than expected 372,000 jobs in June. The unemployment rate held steady at a healthy 3.6%, giving the Fed no reason to deviate from its plan for aggressive rate hikes. Investors may have backed off a bit from overriding recession fears, as the strong jobs report and a recent sharp decline in prices for oil and other commodities allowed for a somewhat higher possibility that the U.S.economy could achieve a soft landing. Investors cheered signs that the central bank was committed to preventing price pressures from becoming entrenched, even if that came at a cost of slowing the U.S. economy.

In addition to the employment statistics, our brokers also saw that the Federal Open Market Committee released the minutes from its last meeting. FOMC policy makers judged that an increase of 50 or 75 basis points "would likely be appropriate at the next meeting (later in July)" given the current economic outlook. They also "recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist. "With the potential for the firmer policy to slow growth, Fed officials also removed language from the June policy statement that "indicated anexpectation that appropriate policy would result in a return of inflation to 2% and a strong labor market."

There was also discussion on steps to shrink the central bank's balance sheet, a strategy known as quantitative tightening. The FOMC projected that net income in its System Open Market Account would decline or potentially turn negative as the increased rate target range lifted interest expenses on some liabilities. Why should Orion’s brokers care? Not only has the Federal Reserve been buying securities issued by the U.S. Treasury, but throughout much of 2020, 2021, and even into 2022 the Fed has been purchasing Agency mortgage-backed securities. Many believe that the Fed will begin to sell these holdings, in which case the laws of supply and demand suggest that prices of MBS will go down, and ratesup.

In the short term, however, most expect the Fed to retain its hawkish stance, especially after Friday's jobs report came in stronger than expected. The tone of the FOMC minutes will cause cognitive dissonance, with markets now openly questioning how far and how long the Fed can tighten policy before having to reverse course. Put another way, the Fed won’t raise rates forever, and will want to taper off the increases as inflation is brought under control and the economy slows. The trick will be to know when that is.

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