The U.S. Bureau of Labor Statistics released their Consumer Price Index (CPI), which measures inflation on the consumer level, and it rose by 0.6% in the month of January. The year-over-year index rose from 7% to 7.5%. The monthly number and annual number were both hotter than expectations and now annual inflation is at its hottest reading since 1982.
Core CPI, which strips out food and energy prices, rose by 0.6% in January. Year over year, Core CPI rose from 5.4% to 6%. These numbers came in hotter than expectations as well.
With inflation creeping up, the Federal Reserve has been at the forefront explaining its plan to help temper it. As the Fed’s love runs out for their Quantitative Easing (QE) with Quantitative Tightening (QT) they should be ending their QE by March 2022. Also, they are going to let their balance sheet of about $8.8 trillion, “roll-off”. When they start rolling off or selling their balance sheet this will increase the supply of bonds and treasuries and when supply increases bond pricing will drop. Because there will be an increase in the supply of bonds and treasuries and no more QE purchases, we may see mortgage interest rates continue to increase.
Another tool the Fed has in its arsenal is hiking the Fed Fund Rate. This is the rate that banks charge when they lend to one another. When they hike this rate, this is seen as deflationary as it curbs inflation. Since bonds react negatively to inflation, bonds actually increase in price when inflation lessons. So, if the Fed hikes their rate in March, we may see a slight mortgage rate improvement that follows. This occurred in the past, in December of 2015 and also in December of 2016.
We must pay close attention to economic reporting and see how the Fed alters its game plan as the economy and interest rates are so tightly tied to this.
Source : https://bit.ly/2Qi5FG0
By: Jon Iacono