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The Fed’s 50-bps hike faces off against the “compressed lag effect”
In the final Fed meeting of the year, Chairman Powell and the FOMC announced a rate hike of 50 bps, lifting the policy rate to 4.25%-4.50%. The decision…
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In the final Fed meeting of the year, Chairman Powell and the FOMC announced a rate hike of 50 bps, lifting the policy rate to 4.25%-4.50%.
The decision was unanimous and very much in line with expectations and prevailing rhetoric.
This marked the eighth consecutive meeting where monetary policy was tightened, although the magnitude of the hike was lowered from 75 bps (which was implemented through the previous four announcements).
The decision came shortly after the publication of CPI which was down at 7.1% YoY (a report of which interested readers can view here), compared to the previous month which registered a rise of 7.7%.
Although Jerome Powell did not appear to suggest that an additional 50-bps hike could be expected in the first meeting of 2023, the Fed’s planned tightening is far from complete, and the market will likely see a 25-bps increase during the next announcement.
The much-awaited dot plot shows an increase in target levels of interest rates from the September projections, with 2023 rising from 4.6% to 5.1%, 2024 increasing from 3.9% to 4.1%, and 2025 from 2.9% to 3.1%.
This increase in the terminal rate was above market expectations, and may well be the last card the Fed can play given the rising turmoil in real estate, underfunded pension holdings and other assets.
After the June CPI peaked at 9.1% (a report of which is available here) and triggered an extended period of frantic tightening, the Fed is left with very limited ability to revise its pathway further upwards without risking a blow to its credibility.
A couple of the members expect the policy rate to rise even above 5.5% in 2023, implying rate hikes into the summer, which would bring a halt to market liquidity and jeopardise credit markets.
Summary of economic projections
Firstly, inflation projections show that the Fed does not expect to see the 2% level materialize until at least 2025.
Worryingly, this implies that the monetary authorities are looking to keep rates elevated for the entirety of that period.
The chart below gives us a sense of the magnitude of the challenge that the Fed faces compared to historic tightening cycles.
Yet, Bank of America’s Head of Global Economic Research, Ethan Harris, expects that although achieving 3% – 4% inflation could be possible, the 2% target may well be out of reach even over a 2-3 year horizon.
The Fed has painted itself into a corner on this issue, by continuing to steadfastly commit to its 2% target.
Arguably, there is nothing sacrosanct about this number, but having put this threshold on a pedestal for years, the FOMC has lost any flexibility to ease this constraint.
Secondly, the Fed has projected unemployment to reach a median level of 4.6% in 2023, and expects this to be maintained through 2024 whiles rates continue to be high.
This is highly optimistic given that the lagged effects of the Fed’s unprecedented tightening will come to bear, while rate hikes are expected to continue.
The Survey of Consumers published by the University of Michigan last month reinforced this concern by stating,
About 43% of consumers expected unemployment to rise in the year ahead, a share last exceeded at the start of the pandemic and before that in 2009.
Just as importantly, in another report by the University, 47% of the top third of earners are also looking to draw down spending over the next year in response to high inflation, which would prove catastrophic for job seekers in the coming quarters.
With reports of plenty of small business closures underway as well, non-college-educated and less-skilled workers will find it harder to secure work.
Monetary lags
Sharp turnarounds in some economic indicators are pointing to what Danielle DiMartino Booth, CEO and Chief Strategist at Quill Intelligence, as well as an advisor to the Dallas Fed from 2006 – 2015, has referred to as the,
…compressed lag effect.
This implies that the pace of tightening this year may have caught up with policymakers, and we could potentially see a faster deterioration in economic activity than in previous cycles.
The real estate sector is highly sensitive to interest rates and witnessed a surge in mortgage rates (which I covered here), as well as a sharp downturn in the Case-Shiller Index (discussed in an article on Invezz) reflecting the lack of buying appetite.
Short-term interest rates in the municipal bond market have shot up as well, a worrying omen of things to come, in one of the safest asset classes in the economy.
The annual percentage change in initial unemployment claims has suddenly turned positive, signalling that more trouble may be brewing in the labour market.
A Fed divided?
Although this decision was unanimous, as inflation levels ease, dovish members may fear that additional tightening could have catastrophic effects on crucial sectors including housing and auto, as well as on overall consumer spending.
The exit of James Bullard, President of the Federal Reserve Bank of St. Louis from the FOMC this year, may mean one less ally for the chairman’s tightening agenda.
Booth believes that things may get very tricky for the monetary body if well-known doves such as John C. Williams of the New York Fed, and Lael Brainard of the Board of Governors were to find new common ground in 2023.
Outlook
Markets will likely see a 25-bps hike during the first meeting of 2023.
Although the Fed has remained resolute, the introduction of potentially more dovish members via rotations, falling inflation expectations, ongoing demand destruction and unwinding of the jobs market will likely force the Fed to pause earlier than the current target.
At this juncture, the Fed is caught between a rock and a hard place, risking much higher unemployment due to over-tightening or else triggering further price instability in the event of easing.
In addition, if refinancing rates continue to rise, negative spillovers may drag down asset values in other markets as well.
It will be interesting to see whether the following dot plot shows a wider distribution, which would imply greater policy friction between the serving members and a strong likelihood of a pivot.
The post The Fed’s 50-bps hike faces off against the “compressed lag effect” appeared first on Invezz.
unemployment pandemic credit markets monetary policy fomc fed federal reserve mortgage rates real estate interest rates consumer spending unemployment
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Homes listed for sale in early June sell for $7,700 more
New Zillow research suggests the spring home shopping season may see a second wave this summer if mortgage rates fall
The post Homes listed for sale in…
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- A Zillow analysis of 2023 home sales finds homes listed in the first two weeks of June sold for 2.3% more.
- The best time to list a home for sale is a month later than it was in 2019, likely driven by mortgage rates.
- The best time to list can be as early as the second half of February in San Francisco, and as late as the first half of July in New York and Philadelphia.
Spring home sellers looking to maximize their sale price may want to wait it out and list their home for sale in the first half of June. A new Zillow® analysis of 2023 sales found that homes listed in the first two weeks of June sold for 2.3% more, a $7,700 boost on a typical U.S. home.
The best time to list consistently had been early May in the years leading up to the pandemic. The shift to June suggests mortgage rates are strongly influencing demand on top of the usual seasonality that brings buyers to the market in the spring. This home-shopping season is poised to follow a similar pattern as that in 2023, with the potential for a second wave if the Federal Reserve lowers interest rates midyear or later.
The 2.3% sale price premium registered last June followed the first spring in more than 15 years with mortgage rates over 6% on a 30-year fixed-rate loan. The high rates put home buyers on the back foot, and as rates continued upward through May, they were still reassessing and less likely to bid boldly. In June, however, rates pulled back a little from 6.79% to 6.67%, which likely presented an opportunity for determined buyers heading into summer. More buyers understood their market position and could afford to transact, boosting competition and sale prices.
The old logic was that sellers could earn a premium by listing in late spring, when search activity hit its peak. Now, with persistently low inventory, mortgage rate fluctuations make their own seasonality. First-time home buyers who are on the edge of qualifying for a home loan may dip in and out of the market, depending on what’s happening with rates. It is almost certain the Federal Reserve will push back any interest-rate cuts to mid-2024 at the earliest. If mortgage rates follow, that could bring another surge of buyers later this year.
Mortgage rates have been impacting affordability and sale prices since they began rising rapidly two years ago. In 2022, sellers nationwide saw the highest sale premium when they listed their home in late March, right before rates barreled past 5% and continued climbing.
Zillow’s research finds the best time to list can vary widely by metropolitan area. In 2023, it was as early as the second half of February in San Francisco, and as late as the first half of July in New York. Thirty of the top 35 largest metro areas saw for-sale listings command the highest sale prices between May and early July last year.
Zillow also found a wide range in the sale price premiums associated with homes listed during those peak periods. At the hottest time of the year in San Jose, homes sold for 5.5% more, a $88,000 boost on a typical home. Meanwhile, homes in San Antonio sold for 1.9% more during that same time period.
| Metropolitan Area | Best Time to List | Price Premium | Dollar Boost |
| United States | First half of June | 2.3% | $7,700 |
| New York, NY | First half of July | 2.4% | $15,500 |
| Los Angeles, CA | First half of May | 4.1% | $39,300 |
| Chicago, IL | First half of June | 2.8% | $8,800 |
| Dallas, TX | First half of June | 2.5% | $9,200 |
| Houston, TX | Second half of April | 2.0% | $6,200 |
| Washington, DC | Second half of June | 2.2% | $12,700 |
| Philadelphia, PA | First half of July | 2.4% | $8,200 |
| Miami, FL | First half of June | 2.3% | $12,900 |
| Atlanta, GA | Second half of June | 2.3% | $8,700 |
| Boston, MA | Second half of May | 3.5% | $23,600 |
| Phoenix, AZ | First half of June | 3.2% | $14,700 |
| San Francisco, CA | Second half of February | 4.2% | $50,300 |
| Riverside, CA | First half of May | 2.7% | $15,600 |
| Detroit, MI | First half of July | 3.3% | $7,900 |
| Seattle, WA | First half of June | 4.3% | $31,500 |
| Minneapolis, MN | Second half of May | 3.7% | $13,400 |
| San Diego, CA | Second half of April | 3.1% | $29,600 |
| Tampa, FL | Second half of June | 2.1% | $8,000 |
| Denver, CO | Second half of May | 2.9% | $16,900 |
| Baltimore, MD | First half of July | 2.2% | $8,200 |
| St. Louis, MO | First half of June | 2.9% | $7,000 |
| Orlando, FL | First half of June | 2.2% | $8,700 |
| Charlotte, NC | Second half of May | 3.0% | $11,000 |
| San Antonio, TX | First half of June | 1.9% | $5,400 |
| Portland, OR | Second half of April | 2.6% | $14,300 |
| Sacramento, CA | First half of June | 3.2% | $17,900 |
| Pittsburgh, PA | Second half of June | 2.3% | $4,700 |
| Cincinnati, OH | Second half of April | 2.7% | $7,500 |
| Austin, TX | Second half of May | 2.8% | $12,600 |
| Las Vegas, NV | First half of June | 3.4% | $14,600 |
| Kansas City, MO | Second half of May | 2.5% | $7,300 |
| Columbus, OH | Second half of June | 3.3% | $10,400 |
| Indianapolis, IN | First half of July | 3.0% | $8,100 |
| Cleveland, OH | First half of July | 3.4% | $7,400 |
| San Jose, CA | First half of June | 5.5% | $88,400 |
The post Homes listed for sale in early June sell for $7,700 more appeared first on Zillow Research.
federal reserve pandemic home sales mortgage rates interest ratesUncategorized
February Employment Situation
By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…
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By Paul Gomme and Peter Rupert
The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.
Temporary help services employment continues a steep decline after a sharp post-pandemic rise.
Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.
The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.
The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.
Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.
As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.
Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.
The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.
unemployment pandemic unemploymentUncategorized
Mortgage rates fall as labor market normalizes
Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.
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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.
The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.
From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250
Below is an explanation of how we got here with the labor market, which all started during COVID-19.
1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.
2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.
Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.
3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too
Total employment data
4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels.
From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.
Here are the jobs that were created and lost in the previous month:
In this jobs report, the unemployment rate for education levels looks like this:
- Less than a high school diploma: 6.1%
- High school graduate and no college: 4.2%
- Some college or associate degree: 3.1%
- Bachelor’s degree or higher: 2.2%
Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.
recession unemployment covid-19 fed federal reserve mortgage rates recession recovery unemployment
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