December 19, 2022

Fed Getting Inflation Under Control

In an attempt to curb inflation, the Federal Open Market Committee (FOMC) hiked the Fed Funds Rate by 50 basis points last week to target a range of 4.25% to 4.50%. This hike took the Fed Funds Rate up drastically from where it was a mere 9 months ago. In March, the Fed Funds Rate was in a range between 0% and 0.25%. It is important to understand that the Fed Funds Rate is not directly related to mortgage rates. It is simply the rate that banks issue when they lend money to one another. A higher Fed Funds Rate helps to curb inflation.

In the Fed’s statement, they said that ongoing increases would be appropriate and they would continue their balance sheet reduction. Another sticking point was the Fed Funds Rate outlook. 17 of 19 members in the Fed forecasted a Fed Funds Rate of over 5%.

Sentiment did shift during Fed Chair Powell’s Q&A session when he acknowledged that “the inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases.” He also added that there would be a 25-basis point hike for the February 1, 2023 Fed meeting. This speaks to the Fed getting inflation under control and slowing the pace of their hikes.

So, what does all this mean? Well, it shows that inflation is slowing. This is indeed a great indicator for mortgage bonds. Afterall, the arch enemy of mortgage bonds is inflation. When inflation increases, mortgage bonds drop in price as it lessens the investor’s appetite, which makes mortgage rates increase. When inflation decreases, mortgage bonds typically improve in price making mortgage rates come down. It is encouraging that inflation is coming down. If inflation continues to lower, it should result in lower mortgage rates.

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By: Jon Iacono
A Family

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