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Some Turbulence Before Landing

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

Yesterday was another big economic data release. The Consumer Price Index came down from November to December. The annualized rate now stands at 6.5% vs 7.1% from the month prior. Excluding the volatile food and energy prices, the index is at 5.7% vs 6.0% prior.

Even though inflation is coming down and calming the market to a decent degree, it will take several more months until it's close to the Fed's target rate. Most expect the Fed's target won't be hit until July at the earliest.

If you recall CPI hit a 40-year high at over 9% at the end of June which eventually pushed the 10-year Treasury to over 4.2% in October. The 10-year is now hovering around 3.5% as the market and the Fed try to figure out if the inflation fight is well under control or not.

The big question right now is what the FOMC will do with the benchmark rate in 2023. The Fed is telling us they have no plans whatsoever to lower the Fed Funds Rate in 2023 and expect to raise it 25-50bps on Feb 1^st and another 25bps in March with a slight chance of another 25bps in May. In fact, most FOMC members expect the Fed Funds Rate to exceed 5% in order to completely extinguish all inflationary risks.

They got some good news last week with the jobs report when the unemployment rate actually went down from 3.7% in November to 3.5% in December. That lends more credence to the notion that the Fed is going to achieve a soft landing with their interest rate policy and may not need to pivot on rates in 2023.

On the flip side, the market still sees a lot of economic risk around the possibility of a recession, and they are pricing in a Fed Funds Rate under 5.0% in 2023 with the Fed likely to lower rates in July or September.

We will need to continue to watch inflation and economic data over the next couple of weeks but the big question coming is what the Fed will do in February; will they raise rates 25 or 50bps?

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