Powell sends mortgage rates up as he questions the December cut
No interest rate cut in December?
The main takeaway from the Federal Reserve press conference was that Powell did not fully support a rate cut in December. While the market still expects a rate cut, his response is typical of Powell, especially now that 10-year yields are near annual lows. He aims to manage market expectations, for reasons I still don’t agree with, as the labor market is clearly weakening.
Powell could have had an easy layup today, but that’s not his approach. As a result, markets are pricing in December’s rate cut with less certainty, but for now they are still expecting it. If the 10-year rate was 4.50% and the mortgage rate was above 6.64%, I don’t think Powell would have disappointed people today, but with the 10-year rate recently below 4% and mortgage rates at an annual low, he would take his chance on pushing back the market.
Employment data is not breaking
Powell also made sure everyone knew the job market isn’t breaking, and he used his two favorite data lines to prove it. Both vacancies and unemployment rates continue to show that the labor market is weakening, but not breaking down.
How can he make these claims without government data on jobs? We do have private sector labor reports and states do have data on their unemployment claims – and all that shows is a modest increase lately. I know this sounds crazy given low job growth, but Powell puts a lot of weight on the decline in the labor force as the main reason for the slowdown.
Consider the chart below: Manufacturing jobs have declined since the end of 2022.
Construction workers are also losing their jobs.
Housing permits are in a recession, and have been for some time, and this has nothing to do with labor force growth.
In 2022, I said the labor market must break before the Fed can ease. This means moving away from the Fed’s favorite talking point: that it is modestly restrictive, which Powell referenced again today.
Simply put, Powell clearly doesn’t believe we have enough contractions to take it easy today and adopt a mild tone in his statements that actually matches his thinking. Remember, this is a guy who said months ago that the job market was solid, but then backtracked weeks later.
Conclusion
Tomorrow’s episode of the HousingWire Daily podcast will cover the entire Fed press event in more detail, but Powell acted at just the right time for me. So many interest rate cuts have been priced into the market that he had to try to reverse December’s interest rate cut today. As always, I believe the Fed needs to see more pain in the labor market before it will abandon its modestly restrictive stance and move anywhere close to accommodative policy.
