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The 2023 Interest Rate Outlook Gets More Clarity

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

While there is general agreement that we can expect the Fed to keep raising interest rates for the remainder of 2022, there has been a lot of uncertainty surrounding the path of interest rates for 2023.

The big question has been when would the Fed pivot and start easing monetary policy if inflation abates and the economy is likely at that point to be in a recession. Well, Jerome Powell recently clarified the Fed’s stance in his speech at the Jackson Hole Economic Symposium.

The Fed Chair indicated that the benchmark rate is expected to remain at an elevated level through 2023. As of today, the futures market expects the FOMC to raise rates another 125bps by the end of 2022 with only a slight probability that they move rates down 25bps from there by the end of 2023.  That would leave the Fed Funds rate right around 3.5% vs. where it stands today at 2.5%.

The Fed’s clarification has put more pressure on the short end of the curve as we now see the 2-year Treasury inching close to 3.5% while the longer-term 10-year Treasury is at 3.1%.

The yield curve is still inverted, and at this point, it’s been inverted long enough that the market is telling us that we are in or are entering a recession. 

Now, looking back at the yield curve over the past 45 years on your screen, you can see the yield curve inverted prior to the recessions of 1980, 1981-1982, 1990-1991, 2001, 2007-09, briefly during COVID of 2020 as well as today.  You can also see the magnitude of the inversion today vs. prior recessions.  The scale of the inversion today is very similar to the 2001 and 1990 recessions.

Over the next couple of weeks, please keep an eye out for inflation data on September 13 when August CPI data becomes available. Inflation is still a big issue—the question is whether or not it is decelerating.  Also, we have the FOMC meeting on September 21.  Will they move 50bps or 75bps? A lot of that will depend on how effective they have been to control inflation so far.

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