What Will the Fed Do About Inflation?

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Filed under: Market Comentary

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One of the biggest talking points in the financial industry right now is the topic of inflation. We are seeing the prices go up across all industries, which means that we are paying more for stuff compared to the prices just a few months ago.

Inflation is the Arch-Enemy to Mortgage Rates

From a mortgage perspective, inflation is the arch-enemy to interest rates. Any time inflation is starting to go up, it’s an indicator that will drive rates up. It’s a basic principle in the mortgage industry and how bonds work.

Today is Fed Day: What Will Happen?

Here’s an interesting perspective: Today is Fed day, and they have been sitting on the sidelines of this topic. At the last meeting, they started shifting the conversation. Two sources that I trust are saying similar sentiments: we are anticipating that they are going to come off the throttle on bond purchases. Recently, they have been buying as much as $120 billion dollars a month in mortgage-backed securities and treasuries.

In the last meeting, they indicated they are going to start coming off $15 billion per month. With less demand in the market, it should drive interest rates up.

The anticipation for today is that the Fed will double it to $30 billion a month, slowing the demand even more. On the surface, it seems like it should increase interest rates and cool inflation at the same time. The counter-intuitive perspective is that the market will perceive it as good news on the inflation front, which might actually help interest rates.

Unusual Predictions for Interest Rates

It could potentially counter-act the effect of seeing rates jump up. Likely, the market will be in a “wait and see” pattern. In the next few days, we might see rates stay the same or come down just a little. It’s not what you would expect me to say, but these are unique conditions. We might have a window of time (6 – 9 months) to tick inflation down. If that doesn’t happen, then I think things could start getting strange in the interest rate market.

These are a few of the things that I am hearing in the mortgage industry. As always, I’m happy to answer questions or hear other opinions. Reach out if you have questions or need information about buying or refinancing your home.

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