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Preventing a Second Inflation Wave

Hello everyone.  Welcome back to the Mortgage Rundown.  Today we are going to talk about what’s happening with interest rates.

Another month rolls by and it’s another month of inflation declining.  Last week we saw the June CPI Report come out with headline inflation dropping to an annual rate of just 3.0%.  Now, as a reminder, exactly a year ago it hit 9.1%.  This is great news and it shows that the FOMC moves have had a material impact on fighting inflation.

The moderately good news is that when you exclude the volatile food and energy prices, the annualized inflation rate is only down to 4.8% compared to 5.9% a year ago, a much smaller decline.  The graph on your screen shows the annualized rate excluding food and energy and, as you can see, some headway is being made. But there is still quite a bit of time to go until inflation returns closer to the Fed’s target of less than 3.0%.

So, even though on the surface it appears inflation is coming down very rapidly, we have to be cognizant of the fact that the Fed is very concerned about inflation spiking back up again.  Their greatest concern today is not just getting inflation to come down but keeping it down for a longer period.

For example, take a look at the stock market and the jobs market.  The stock market has continued to push higher and higher since October of last year.  Not to mention the unemployment rate is barely above its all-time low, with the June rate at a mere 3.6%, which is also down from May.  It’s becoming clear that the large fears of a recession were overdone, and the likelihood of a soft landing is very real. 

With all of that being said, there’s a strong possibility that the Federal Reserve will raise rates next week just to prevent the market from getting overheated and we see another spike in inflation.  We believe the Fed must keep rates higher for longer and, until there is a material recession risk, the Fed will continue to play it conservative to prevent further price spikes.

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