Mortgage Resources

Search with GoPrime Mortgage

Check out our guides, tools and research for expert help on all your home mortgage and marketing questions!

Is The Fed Going to Kill The Economy?

January 28, 2022
Milestones in the mortgage process - bozeman montana local lender

January has been a month marked by the market’s adjustment to a shift in the Fed policy outlook.  This began right at the outset and resulted in higher rates and lower stock prices.  

Why?

Last week’s newsletter goes into great detail on the matter.  Revisit it HERE.

This week merely served to confirm what we already knew, namely that the Fed would not be making any policy changes this week, but that it would do nothing to push back on the expectation for policy changes at the next meeting.

Language was added to the announcement to suggest a rate hike at the next meeting, and there was no change to the pace of tapering (which will be concluded before the March Fed meeting).  Last but not least, Powell said the Fed remains on track to begin trimming the balance sheet as early as the June Fed meeting–perfectly in line with our previous assumptions.

Stocks and bonds get a bit cranky when the Fed yanks the proverbial punch bowl away–even if they knew it was coming.  Fortunately, they’d prepared quite well for this week in terms of trading levels.  Sure, there was a bit of a volatile reaction at first, but the next 2 days of trading confirm that the Fed didn’t truly surprise the market (i.e. volatile trading with rates and stocks ultimately making it back near pre-Fed levels).

20220128 nl5.png

In the slightly bigger picture, we can see the damage that’s already been done (and the possibility that big stock losses have helped rates avoid bigger spikes).

20220128 nl4.png

Despite the ultimately flat reaction to this week’s Fed news, some market participants are worried the impending Fed rate hikes will do something to tank the economy.  This includes potential damage to home prices, stocks, and home sales.  With those concerns in mind, and with the caveat that this data was only updated through November this week, here’s how home prices are doing:

20220128 nl6.png

Here’s how Pending Home Sales are doing (with a bonus overlay of mortgage rates):

20220128 NL7.png

And here’s how stocks are doing (gray line).  This chart also includes the most recent Fed rate hike cycle along with broad economic metrics for the manufacturing and services sectors.  It shows that the economy and the market continued to expand for years as the Fed continued hiking rates.

20220128 nl3.png

How about rates?  If the Fed is hiking the Fed Funds Rate, what does that do to mortgages?  The Fed only meets 8 times a year.  Meanwhile, rates move every day.  As such, rates do a great job of getting in position for Fed rate hikes before they happen.  That’s one of the reasons mortgage rates were able to fall for roughly a year after the previous Fed lift-off.

20220128 nl1.png

How have rates been doing in terms of getting ahead of Fed policy changes this time around?  In a nutshell, it was even more of a given this  time compared to 2015.  We knew covid was taking an artificial bite out of the economy and that rates would move back up as the pandemic progressed.  Unexpected speedbumps have slowed down the initial rising rate trend, but it began all the way back in August of 2020.

20220128 open1.png

If it doesn’t FEEL like rates have been rising since August 2020, that may be because mortgage rates were a notable exception at times for a variety of reasons.

20220128 open2.png

This apparently large rate spike is only now getting rates back into what had previously been the all-time low range.

20220128 nl10.png

If the rising rate environment of 2016-2018 is any guide, rates could indeed continue higher.  That’s actually the baseline assumption for the average market participant, but it relies on continued progress against the pandemic, and an absence of other significant market shocks.  Even if rates stick to the unfriendly trend, history suggests it won’t be the end of the world, and perhaps not even the end of the economic expansion (not any time soon anyway, but critics often fault the Fed for leaving rates too high for too long as economic contractions approach).

Related News & Articles

Benefits of Becoming a Homeowner

Benefits of Becoming a Homeowner

Given the fluctuating (and current!) housing market, it’s sometimes easy to wonder “Is it worth it to buy a house?” The steps to becoming a homeowner may seem daunting, and we get that. The positives of owning a home often far outweigh the negatives that many may...

What You Should Know When You Are Ready to Buy a Home

What You Should Know When You Are Ready to Buy a Home

Getting Ready to Buy Getting ready to buy a home can feel like a daunting task.  The gravity of the decision can be enough in itself, but along with that comes all the little competing voices telling you how you should go about the process.  Things you’ve heard from...

Your Guide to Buying a Home in Bozeman

Your Guide to Buying a Home in Bozeman

How to Choose the Right Mortgage Lender Are you considering buying a home in the picturesque city of Bozeman, Montana? Congratulations! Bozeman offers a unique blend of outdoor adventure, cultural attractions, and a thriving community, making it a desirable place to...