A Look Into the Markets - June 14, 2024

by Geri And Tim Penner

This past week the Federal Reserve decided not to cut rates and shared their updated forecast on the economy. Let's discuss what was said and what's ahead for the upcoming week.

"Does that make me crazy? Possibly" – Crazy by Gnarls Barkley.

Higher for Longer Continues

The Federal Reserve met last Wednesday and once again decided to pause and make no change to interest rates. The markets widely expected this, but what caught many off guard was the Fed's updated summary of economic projections.

This is where the Fed gives its quarterly update on where it sees unemployment, economic growth (Gross Domestic Product), inflation, and where interest rates are headed for the next couple of years. There were a couple of big surprises. First, the Fed believes inflation may not come down any further for the rest of the year. And because of this, the Fed lowered its forecast of interest rate cuts from three this year to just one.

At the same time, they maintained their forecast for economic growth and the unemployment rate which are expected to come in at 2.1% and 4%, respectively, at year's end.

Hawkish Press Conference

Thirty minutes after the Fed statement was released, Fed Chair Powell held a press conference, and here he amplified the position of keeping rates higher longer until inflation moves sustainably towards their goal of 2%.

Despite acknowledging that the jobs report likely overstated the strength of the labor market, the sector market remains tight with unemployment at historically low levels. Mr. Powell also shared he sees no recession on the horizon.

Overall, the Fed continues to see no landing, and with the economy just chugging along, eventually cutting rates. This forecast, like any forecast, is subject to change, based on the data.

CPI and PPI Come in Low

The Fed calling for inflation to potentially rise from current levels took some of the shine from the low Consumer Price and Producer Price Index for May readings midweek. Inflation readings with or without energy could likely be a one-off in May, as oil prices are already up 10% in June near $80 a barrel.

Bottom line: The near-term outlook for rates is uncertain now that the Fed said it's still higher for longer. Longer-term rates should continue to gradually move lower as the economy continues to cool and unemployment rises..

Looking Ahead

Next week brings some important readings on the economy including Retail Sales, Existing Home Sales, and S&P Global PMI. On top of this, there will be a 20-year Treasury auction and a ton of Fed speak. With the Fed saying higher for longer this week, expect more of the same.

Mortgage Market Guide Candlestick Chart

Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.

If you look at the right side of the chart, you can see how prices fell early on but recovered by week's end and held rates steady.