Last week the Federal Reserve raised the federal funds rate by 50 basis points. This was the first hike that was this large in 22 years. Now, the federal funds rate is in a range of 0.75% and 1.0%. Is the Fed going to continue to raise the Fed Funds rate at the next upcoming meetings? There are eight meetings in total with only five left on the calendar this year. When the Fed hikes rates they are attempting to “cool” or “curb” inflation. This happens as a result of making money more expensive by tightening up the money supply which then slows down economic activity.

Speaking of inflation or the arch enemy of bonds and interest rates, the Personal Consumption and Expenditures (PCE) report was released recently that showed headline inflation rose 0.9% in March, which was higher than estimates of 0.5%. The year over year inflation number increased from 6.3% to 6.6% and a 40-year high. Core PCE, which is the real focus for the Fed, rose 0.3% in March and decreased by 0.1% to 5.2% year over year.

The Fed Chair said during his press conference on Wednesday of last week that he thinks the Fed has a good chance of a soft landing. He also signaled that the central bank would not take more aggressive hikes at upcoming meetings.

Bonds and interest rates react negatively to inflation. Since the Fed is taking the “soft landing” approach to lowering inflation, bonds began to sell off last week causing interest rates to increase. If the Fed does their job to lower inflation, then we might start seeing a reprieve where bonds react positively which would then cause mortgage interest rates to decrease.

We all must keep in tune with the Fed and their current plan as this is already impacting the mortgage market. It is important that you work with a trusted advisor who understands this and helps you work the Fed’s goals into your business plan.

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