Are Mortgage Rates Pivoting Before The Fed Does?

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Starting with the Fed's talking lines on Wednesday, the economic environment, including mortgage rates (6.34%/30-yr), shifted last week.

The labor market is still thriving, as seen by another strong employment report released on Friday, which initially drove bond rates higher. However, the way the day concluded indicated that change is on the way.

Read also: Seller's Market? Buyers Market? Neither, Blame The Lock-In Effect

Investors now have a clearer picture of what the Federal Reserve intends to do with its rate hikes, as well as a lot of evidence indicating that the economy will look different in a year. Investors can also hedge a potential recession by micro-investing in the housing market to earn passive income.

This will be crucial to consider in 2023, especially if the labor market slows down sufficiently to cause a job loss recession, as the Fed desires.

Fed Chairman Powell stated that the Fed does not want to overheat the economy, which would require them to drop rates more quickly later.

It confirms the assumption that much of its aggressive messaging over the last year was targeted at maintaining financial conditions as tight as possible until reaching its neutral fed funds rate.

The Fed did not want mortgage rates to fall or the stock market to rise, but it now looks like a 5% fed funds rate is where they want to go.

Can they make it if they hike at a slower pace? Maybe. One of the two pillars they're leaning on for their aggressive rate rises in 2022 is the labor market.

Last week, the Fed made it clear that it is concerned about over-hiking interest rates. Since the November CPI data, the bond market and mortgage rates have plummeted dramatically: mortgage rates have declined by 1% since then.

Read also: US Government To Support Mortgages Over $1 Million For First Time As Home Prices Ebb At Record Highs


The true story of the week, though, is the bond market's reaction, even after the better-than-expected employment data. A solid employment report a few months ago would have driven the 10-year yield significantly higher, and it would have closed the day higher, which would have been awful for mortgage rates.

Bond yields, on the other hand, fell on Friday. Friday's job news and bond market reaction to it might indicate a tipping point in which the bond market begins to pivot ahead of the Federal Reserve, which would benefit mortgage rates. 

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