The actions of the Fed are geared toward taming inflation
While she noted that the Fed’s actions gave the impression to be having leads to curbing inflation, she was surprised that the central bank didn’t allow the standard six-month period between rate hikes to check their impact in the marketplace, because it has done previously.
Instead, “The Fed raised rates of interest seven times last yr in an effort to quell inflation, but never waited for it to occur,” she said. “He just raised the stakes at every meeting. As a result, we at the moment are seeing an economy combating much higher rates of interest. We see inflation easing and we also see signs of the economy weakening.”
However, he returns to his mantra “bad news for the economy is nice news for bond yields” to clarify the positive effect on mortgage rates. “Mortgage rates aren’t tied to the bond market,” she repeated. “The bond market mainly reacts to economic data to predict where the market goes. Bond yields have fallen almost a full percentage point since November, and mortgage rates have fallen with that.”
The knee bone is connected to the femur…
Think of it as bony fusion: “The fusion is like something like a knee bone fused to a femur, where the inflation rate is tied to bond yields, which is tied to mortgage rates,” she said. “So as inflation falls, bond yields fall and mortgage rates fall.”
This sets the stage for a latest narrative – time to get out the token popcorn and watch the way it all might unfold: “This yr we’ll see the direction of rates based on where the bond market is heading,” Cohn said. “If we proceed to get weaker economic data, if we proceed to see inflation fall on a monthly basis, mortgage rates will proceed to fall.”