Rates ended the week slightly lower relative to last week. It was a relatively quiet week and shortened by the markets being closed on Monday but still a few items worth mentioning. Let's take a quick look!
This year (as with last), the Fed is going to be front and center. On that theme we received the Fed Minutes from their last meeting and it showed that officials are committed to a restrictive policy stance until the incoming data provides confidence that inflation is on a sustained path to their target level. The Fed has long maintained that they want to see inflation at 2%. Now the good news is that the latest inflation data we’ve received shows that if the latest couple months of inflation data carry forward we’d be near their target within another 10 months. The Fed just isn’t willing to consider 2 months’ worth of data as “sustained.” As I mentioned a couple weeks ago, the Fed doesn’t just want to make sure the campfire that is inflation is put out, they want to bury it in the dirt and make sure that it’s cool to the touch. Smokey Bear is the Fed and they are not messing around with this fire. They do not want to prematurely loosen monetary policy and cause inflation to heat up again.
So the Fed will continue slowing their pace of rate hikes but not stop or reverse course and start lowering the Fed rate until inflation is on a comfortable path. As inflation cools, mortgage rates will come down. However, so long as the Fed rate is elevated other goods will essentially be more expensive since credit card rates, car loan rates, personal loan rates and 2nd mortgages are all more expensive. The Fed wants consumers to be buying less goods, it’s the only real way to curb inflation. The other big side effect of this though is a big one. And that’s jobs. As companies sell less goods they have to reduce prices (inflation slowing) and as they reduce prices and sell less goods they make less profit. Too much time of lower profits means that first companies start hiring freezes and then eventually start cutting jobs.
The good news so far is that we haven’t seen the effect on the jobs market. On Thursday, we received the ADP Employment Report and it showed 235,000 jobs being created in the month of December which was stronger than the 150,000 that were expected. Small and medium businesses added about 386,000 jobs while large businesses shed about 151,000 jobs. Leisure and hospitality led the way on the gains front. In todays Bureau of Labor Statistics (BLS) Jobs Report it came in with 223,000 job gains when expectations were for 200,000. Large businesses continue to show some weakness and garner headlines in regards to job cuts but so far the small and medium businesses have been able to pick up the slack. December jobs reports are always a bit tricky as they can include a lot of seasonal/part time workers but so far, no weakness to be seen in the jobs market.
Next week we’ll be getting more inflation data in the form of the Consumer Price Index but it’s relatively quiet otherwise.
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