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Inflations Long Descent

Hello everyone.  Welcome back to the Mortgage Rundown.  Today we are going to talk about what's happening with the Capital Markets

Here we stand, one year into the Fed's campaign to slow the economy down and bring inflation under control. The FOMC has now raised their overnight rate by 4.5% and all indications today point to a terminal rate that will touch over 5.5% sometime later this year.

The market was expecting a terminal rate around 4.75% for quite some time, but due to the most recent jobs report and inflation appearing to be stickier than expected, that is no longer the case. If you look at the chart on your screen, it shows the September Fed Funds Futures contract, which now implies the key overnight rate hitting 5.6%.

Since the release of the January jobs report, there has been a material shift in both the Fed as well as the market's opinion on how difficult bringing inflation down to 2% will be.

A couple of key things to keep an eye on. We have the February jobs data coming out tomorrow as well as inflation data becoming available next week. If the jobs data continues to be strong and inflation isn't coming down as quickly as the market is expecting then we will likely see higher rates for the balance of 2023.

On the flip side if the jobs data comes in much lower than expected and inflation does drop materially then we could see a total market shift in sentiment and rates could drop later this year.

That's it everyone from the capital markets desk this week. Thank you all for watching and have a great day.