Imperfect Hindsight

May 13, 2022 -- There remains little good news to be seen on the inflation front, but with the Fed now starting the process of lifting short-term rates quickly, there's a better chance that price pressures will be attenuated sooner. While the Fed will likely lift rates toward 'neutral" (and likely beyond) "expeditiously", as the Fed Chair put it, there have of course been plenty of folks who think the Fed should have started removing extraordinary monetary supports far earlier. Certainly, with a $900 billion of fiscal stimulus in late December 2020 and another $1.9 trillion in March 2021 and monetary policy running fairly wide open, the prospects for rising inflation were increased.

Federal Reserve Chairman Jerome Powell was confirmed by the Senate 80-19 to hold the post for another four years this week.

In an interview with Marketplace this week, the Fed Chair said "if you had perfect hindsight you'd go back and it probably would have been better for us to have raised rates a little sooner. I’m not sure how much difference it would have made, but we have to make decisions in real time, based on what we know then, and we did the best we could. Now, we see the picture clearly and we're determined to use our tools to get us back to price stability."

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While there is no way to know "how much difference" an earlier cessation of bond-buying and a sooner start to lifting short-term interest rates would have made, it's reasonable to think that the economy might already have been slowing in a measured manner, that we might not have seen inflation move quite as high as it has, and that markets might have reacted rather more calmly.

Perhaps the time to have started to move toward tighter policies was last May, when the Fed's preferred measure of inflation (Core Personal Consumption Expenditures) climbed to a 3.5% annual rate, about 150% of the Fed's stated target. Maybe over the summer, when that measure crept higher, holding 3.6% for three months, or October, when inflation was about 200% of target. In September, the Fed's foot was still on the throttle and remained so until November, when they began to accelerate less -- not braking, just easing up on the pedal a bit.

Regardless, the Fed is now off the throttle and starting to apply the brakes as strong as it dares. It's not clear whether the late start to try to slow the economy will end well; a series of half-point hikes in short-term rates, higher market-generated rates and tightening financial conditions run the risk of slowing the economy too quickly or too much, causing a recession. The Fed's record of engineering "soft landings" isn't very good, and Mr. Powell noted in his interview that "whether we can execute a soft landing or not, it may actually depend on factors that we [the Fed] don’t control." These include the effects of the war in Ukraine and the recent COVID-related shutdowns across China, among other factors.

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There was plenty of inflation data to be seen this week, and while there was a modicum of good news is a way, there was also some not-so-good news, too.

Upstream of consumers, Producer Price increases also showed a bit of moderation, posting a 0.5% increase for April, less than one-third March's increase. Goods prices increased by 1.3%, the smallest amount in three months, and service-related inflation featured no increase at all for the month. Annual measures of PPI also slowed a bit in April, with the headline figure now 11% year-over-year (down from 11.5% last month); core goods inflation were essentially flat at 10% (9.9% in March) and service-related price increased settled back to 8.1%, the lowest figure since last November. As with CPI, these figures remain quite elevated, and some of the inputs that trimmed prices a bit last month probably won't continue to do so this month.

While also at high levels already, prices of imported goods showed no change at all last month. Last month's lower energy costs (petroleum products were -2.9% for the period) and a very strong U.S. dollar contributed to keeping import prices in check. Still, costs of goods coming into the U.S. are 12% more expensive than a year ago, so it's not as though there are lower prices being passed along. Costs for goods we export also moderated, posting an increase of just 0.6%, the smallest monthly increase since last September. The same strong dollar that makes imports less costly has the reverse effect on exports; export costs are still a full 18% higher than they were a year ago, although that was a slight improvement from March's figure.

The sharp rise in mortgage rates and the corresponding slowdown in mortgage originations has not so far resulted in any substantial loosening in mortgage underwriting standards. That's the takeaway from the latest Fed Senior Loan Officer Opinion Survey, which polls 60 banks regarding their lending practices. To be fair, the mortgage market is comprised of thousands of outlets and has been dominated by mortgage bankers since after the Great Recession, so the SLOOS is instructive, if not all that deep. According to the poll that closed in April, there was only slight easing of underwriting criteria for GSE-backed loans, Government-backed loans, QM and QM jumbos and non-QM and non-QM jumbo loans. Standards were unchanged about 88% of the time or more, with mostly single-digit percentages of "slight easing". This despite demand that has fallen sharply; for example, demand for GSE-backed loans was said to be "moderately" or "substantially" weaker by 50.9% of respondents, and 37% said demand was "about the same" as it was in the previous poll. Government-backed loan demand was reported by 51.9% to be roughly the same as it was, with 40.7% reporting fewer requests.

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Applications for mortgages ticked a little higher in the week ending May 6. The Mortgage Bankers Association reported that requests for funds to purchase homes rose by 2.2%, a second consecutive week with an increase (the first back-to-back gain since early March) while applications to refinance existing mortgages slipped by 4.5% after managing a slight gain the previous week. We're just about in the middle of the traditional "spring homebuying season", and so it's not surprising to see at least a little improvement for purchase applications. There is no routine season for refinancing, and with fixed mortgage rates at 12-13 year highs it's unlikely that homeowners will start rushing to get new mortgages anytime soon.

Supply chains continue to have their issues, but goods are flowing. Inventory levels at the nation's wholesaling firms increased by 2.3%, continuing a strong string of rebuilding stockpiles depleted during the pandemic. That said, goods are still flying off the shelves; during the month, sales rose by 1.7%, and the net result meant that inventory-to-sales ratios didn't budge, remaining at a tight 1.22 months of supply at the current rate of sale. Pre-pandemic, this ratio was typically 1.33 months, so some inventory rebuilding still needs to occur, which is good news for manufacturers, provided they can get the raw materials they need to produce goods.

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With labor markets very tight, unemployment claims had recently declined to about 53-year low levers. While they still remain very low, they have crept back up in recent weeks, perhaps signaling a slight change in the employment situation. In the week ending May 7th, 203,000 new applications for unemployment assistance were filed across the U.S.; the prior week sported a final tally of 202,000, and this was the first pair of 200K+ readings since early March. These are very low levels, of course, and still consistent with a strong job market, but perhaps it is starting May off slightly less strong than it has been in recent months. We'll know more in the weeks ahead.

Consumers are not happy. The preliminary May review of Consumer Sentiment from the University of Michigan found rather darker moods than those seen in April. The sentiment index declined by 6.1 points to 59.1, the lowest figure since March 2009. If you'll recall, there was a little thing later called the "Great Recession" going on about then, so it's clear there's not a lot of joy to be seen these days. Consumer assessment of current conditions dropped to 63.6 (also a March 2009 level) while the outlook component posted a 6.2-point decline to 56.3 a figure among the bleakest since 2011. Consumers polled also see inflation running at a 5.4% clip next year, the same figure reported in each of the last three months. That would be a considerable decline from where prices are currently running.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
May 06Apr 08May 07
6-Mo. TCM 1.43% 1.15% 0.04%
1-Yr. TCM 2.10% 1.77% 0.06%
3-Yr. TCM 2.92% 2.67% 0.32%
10-Yr. TCM 3.01% 2.59% 1.60%
Federal Cost
of Funds
0.870% 0.791% 0.845%
30-day SOFR (daily value) 0.30270% 0.22569% 0.01000%
Moving Treasury Average
0.477% 0.324% 0.118%
Freddie Mac
30-yr FRM
5.27% 5.00% 2.96%
Historical ARM Index Data

If perhaps behind the curve, at least the Fed is now actively on the job of trying to contain price pressures. Since the Fed's move last week and the revelation that at least two more half-point hikes are likely over the next ten weeks, markets can't seem to decide whether lifting rates quickly is a good thing or whether such abrupt moves will cause an economic downturn in the coming year. In recent days, equity markets have been modestly higher, considerably lower and then improved somewhat; oil prices started the week above $110 per barrel, dropped to about $100 then bounced back to about $110 by the end of the week. The influential 10-year Treasury was at about 3.19% on Monday, dropped to about 2.83% on Thursday, then kicked higher to close the week at about 2.92%. It's anyone's guess as to what next week will bring, but at the moment, and if it holds, the dip in Treasury yields suggests that mortgage rates might ease just a little bit in the coming days. With that as a backdrop, we think that the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac may hold steady next week, or perhaps decline by a couple-three basis points.

The hard shift in mortgage rates in 2022 has made forecasting future conditions nearly impossible; regardless, we're always willing to give it a go. See our newest Two-Month Forecast for mortgage rates, which looks at mortgage rate conditions though early July.

Our recent 2022 Outlook outlines our expectations for mortgage rates, Fed policy, home sales, home prices and more. Have a look if you're curious as to where we may be headed in '22.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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