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Transitory Inflation

Hello, everyone, and welcome back to the mortgage rundown. Today, we're talking about what's happening with interest rates.

By now, you know that the FOMC met last week and actually elected to start tapering the asset purchase program. In summary, the Fed has been buying $120 billion of Treasury and mortgage-backed securities each month, and now they're going to reduce that amount by $15 billion each month, at least in November and in December.

So, what does that mean and why did they do that? Well, the problem they have right now is actually inflation. And so, what they need to do is actually slow down the economy and very, very carefully raise interest rates. And they do that by reducing the amount that they buy of both Treasury and mortgage-backed securities.

What the Fed was really worried about was Taper 2.0. Taper 2.0 is a reference to May of 2013, when Ben Bernanke came out and unfortunately said he's going to start the tapering program back then, and it caused a worldwide and market panic. By all accounts, the FOMC did a phenomenal job in conveying tapering 2.0, his next round, where they're actually reducing the purchase of mortgage-backed securities and Treasuries. There has not been a major market reaction to the tapering announcement. In fact, what we actually saw was interest rates went up a little on the day of the announcement, went down the next few days and now is moving back up.

What the Fed needs to deal with now is inflation. Yesterday was CPI, and it came in much higher than expected. And so now the Fed is going to have to deal with the fact that inflation is still very sticky, that it does not look like it’s temporary, and that the tapering may not have done enough. It certainly hasn't necessarily caused any major reactions to the market. But now the market's going to be staring at an inflation.

In the coming weeks ahead, we really need to keep an eye on inflation. What other data points are going to come out to indicate whether or not inflation is going to be persistent? Now, if I'm a betting person, I will tell you that demand is very strong. If you look outside your window, or especially if you're near the ocean, you will see a line of cargo ships unable to unload their cargo. The demand is there. The problem is supply is not there. The supply lines are broken and they are not keeping up with demand, and that's going to keep putting more pressure on inflation, which is going to put more pressure on interest rates and the Fed.

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