Anthony Chan
Anthony Chan
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What the Fed showed was that extraordinary circumstances require an extraordinary strategy. Not only are they moving rates to lows not seen since the early '60s, they're prepared to move them a lot lower.
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The stock market didn't want the economy to grow too quickly because they were worried about aggressive rate hikes, ... They wanted the Goldilocks approach where everything was just right. But now they realize that maybe the porridge is a bit too cold for their taste.
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The significant number of headwinds such as rising energy prices and the prospects of rising short-term rates are taking their toll on the economy,
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The rise in the unemployment rate takes much of the sting away from the robust gain in payrolls from a monetary policy perspective. The big fear ahead of the release of this report was that labor markets were overheating.
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Rates might be low, but people are starting to realize that rates will go up. Remember you've got to get a mortgage down the line, maybe six months out when the home is complete. People are preparing for it.
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Everybody knows energy prices are out of control. But to see the core number coming in line with expectations and the year-over-year figure actually declining tells me the Fed is back on plan to move at a gradual pace (of rate increases.)
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There's no question these higher mortgage rates will take some of the shine off the resiliency in the housing market,
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It could raise expectations of a pause (in Fed interest rate hikes) after the August meeting,
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I think this is an important first step for the central bank. They didn't want to lower rates too aggressively for fear of sending a signal to the markets that they thought things were completely falling apart.
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Today's Fed rate cut and directive clearly reflects the fact that the Fed is coming to the end of its rainbow and therefore wants to ensure that it still can convince financial markets that it still has further flexibility to do more if it needs to.
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But what we've seen is if you hit the economy over the head enough times with higher energy prices and short-term interest rate hikes, it reacts.
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Several times in the last year we've seen mortgage rates creeping up and housing hasn't responded. Now the Federal Reserve has put some credibility behind the increase in rates. I think it set a general tone for the housing market that it'll be a lot more muted.
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More rate cuts may not be forthcoming, but the Fed is also not likely to start raising rates as quickly as financial markets expect.
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Mortgage rates will put a little bit of a brake on housing activity, ... but it may come precisely as other sectors start to turn around.