This Week In A Nutshell: Mortgage rates dropped last week after President Trump announced $200B of MBS purchases. This week starts with news of the Justice Department’s criminal investigation into Fed Chair Jerome Powell. Inflation data comes out on Tuesday.
Upcoming Attractions
Inflation data is the main headline for economic data this week, but we’ll also be watching for a possible ruling on tariffs from the Supreme Court and further announcements on housing affordability from the White House.
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- CPI/PPI Report (Tuesday/Wednesday):The CPI report is expected to show a rebound in inflation after several methodological issues caused inflation to be underreported last month. It will still not be a clean reading because one issue, the underreporting in shelter inflation, is likely to persist through April.
- Possible Supreme Court ruling on tariffs (Wednesday): The Supreme Court did not issue a ruling last Friday on the President’s authority to implement tariffs via IEEPA. The ruling may come on Wednesday. If the Court rules against the White House, the President is expected to reinstate the existing tariffs via other authorities.
- Housing data:
- New Home Sales for September/October (Tuesday)
- Existing Homes Sales for December (Wednesday): Redfin’s forecast is an annual rate of sales of 4.15 million seasonally adjusted (337,000 sales closed in December), which is up very slightly from November.
Last Week’s Highlights
- $200B MBS purchase: The President’s announcement of a $200 billion mortgage-bond purchase caused mortgage rates to drop slightly. However, the ultimate impact is likely to be limited because of questions around plausibility and the relatively small size of the program compared with similar past efforts from the Fed.
- Jobs report: Last week’s data once again highlighted the low hire-low fire nature of the labor market with both a tepid pace of job creation and a small drop in the unemployment rate from 4.6% to 4.4%. The data did not move rates and will leave the Fed on pause for the foreseeable future.
- DOJ investigation of Fed Chair Powell: Financial markets reacted late on Sunday with slightly higher rates, weaker dollar, and a small drop in the stock market after Fed Chair Powell issued a response to news that the department of justice had opened an investigation into his handling of renovations at the Fed. More below.
Diving a Little Deeper: What does the latest development in the ongoing tension between the White House and the Fed mean for housing?
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- The latest news is broadly being interpreted as another possible threat of the Fed’s independence in setting interest rate policy.
- Political influence in monetary policy is likely to result in higher mortgage rates than lower mortgage rates. Here is what we wrote a few months ago on this issue: The Federal Reserve only directly sets the Fed Funds Rate, an overnight lending rate, which influences, but does not determine long term rates such as mortgage rates. Mortgage rates are priced off of ten year treasury yields, which are determined based on investors’ expectations for economic growth and inflation over the next ten years. Mortgage rates can move in the opposite direction of short term rates like the Fed Funds rate, if investors believe, for example, that the Fed is cutting too much and risking higher inflation in the future. This trade off between short term and long term outcomes is why the Fed’s independence is so critical. One recent example of the effect of eroding the Fed’s independence was on July 16 when Bloomberg reported that the President intended to fire the Fed Chair. Long term rates increased while short term rates fell on the news until the President dismissed the report as inaccurate.
- Following the news, markets moved a little with slightly higher rates, a weaker dollar, and a drop in the stock market. Investors are likely waiting to see how Senate Republicans respond. Senator Thom Tillis said Sunday that he will oppose any nominee to the Fed, including for the chair vacancy, until this issue is resolved.
Redfin Housing Market Reports
- Trump’s Mortgage Bond Order Pushes Rates Below 6% For First Time in Nearly 3 Years, Boosting Purchasing Power
- Purchasing power has increased $30,000 in the last six months, with rates falling below 6% the day after President Trump ordered a $200 billion mortgage bond purchase.
