The Challenge in Predicting Interest Rates
As mortgage and real estate professionals, we naturally focus on interest rates. Higher rates typically translate into fewer home sales and lower mortgage volume. Conversely, lower rates speed up the velocity of money, driving home sales and mortgage volume.
While understanding interest rates is essential for advising clients, it isn't the sole indicator of your future business. As Horst Schulze aptly says, “as long as your competitor has a single client, it is not the market.” Similarly, Shant Banosian at Rate expresses, “I don’t care what the market is doing; I make my own market.” Essentially, he creates his own market reality by working harder and taking more market share.
However, as a mortgage or real estate professional, it is crucial to understand the Fed, markets, and where interest rates are heading. Let’s explore some opposing opinions on rates.
The Fed Whisper is Back
In his article, “A Fed Rate Cut is Finally Within View,” Nick Timiraos reveals that while the Federal Reserve isn’t likely to change interest rates at their meeting this week, they will likely signal cuts as early as September. He notes that the Fed is largely satisfied with the current labor market and may not be concerned about achieving the last mile in hitting their 2% inflation target.
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A Sticky Last Mile
In his weekly newsletter, Thoughts from the Frontline, John Mauldin leans towards few or no interest rate cuts this year. He cites several analysts, including James Bianco of Bianco Research and David Stockman (former Director of the OMB), who believe there will be no interest rate cuts this year.
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Daily and Weekly Indicators for the US Economy
Torsten Slok , Rajvi Shah , and Shruti Galwankar argue in their paper that many leading indicators on inflation are still flashing red. These indicators include GDP, strong retail sales, improving jobless claims, increased hotel occupancy, growing lending, lower bankruptcy filings, rising jet fuel demand, rising Broadway show and movie box office receipts, and near-record profits from the S&P 500.
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Why the Fed’s First-Rate Cut Wouldn’t Be That Big of a Deal
Sam Ro, in his newsletter titled, “Why the Fed’s first-rate cut wouldn’t be that big of a deal,” argues that all this talk of a rate cut is much ado about nothing. He suggests that a 25-bps cut will have little impact and is already priced into the market. He likens it to turning the temperature down from 100 degrees to 95 degrees—it’s still hot at 95 degrees. In other words, Fed policy will continue to be restrictive even after a small cut in interest rates.
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Interest Rates Are a Sideshow in the Fed Drama
In a recent editorial in the The Wall Street Journal , former Fed member Kevin Warsh argues that the Fed’s interest rate policy isn’t what’s important. Instead, what’s critically important is the Fed's balance sheet, which he predicts will stop shrinking and remain bloated at its current level of $7.3 trillion.
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Fiscal Dominance Is Here
Michael Lebowitz, CFA from RIA Advice, in his paper, “Fiscal Dominance Is Here,” strongly argues that the Fed will start to dramatically increase its balance sheet and implement banking policies that will support significantly lowering interest rates.
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You can glean almost anything you want from these varying opinions. The important is for you to form an opinion and a strategy so that you can best serve your clients.
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