Powell’s remarks shoot mortgage rates higher

The fallout from Fed day got out of hand very quickly. The market reacted badly to the FOMC statement and remarks by Federal Reserve Chairman Powell during the Q&A presser, sending the 10-year yield and mortgage rates higher. Also, the Dow was down over 1,000 points today.

So what gives? Market players were already talking about how the Fed would dial back rate cuts in 2025, but Powell didn’t sound sure of himself in that press event and left an opening to create tighter financial conditions. What he got is higher mortgage rates — again.

Key takeaways from the Fed presser

1. Powell didn’t seem very confident while answering some questions about inflation and the labor market. He consistently emphasized that while the labor market is softening, it hasn’t completely broken. This has been my main observation regarding Powell and the Federal Reserve since 2022: They won’t truly pivot until the labor market breaks. I’ve been cautious about getting to sub-6% mortgage rates until the labor breaks. The Fed became fearful after the negative revisions and decided to cut aggressively in September, but now they have backtracked from that fear regarding the labor market.

2. The Fed raised its inflation forecast to 2.5% PCE for 2025. Two years ago, achieving this would have seemed like a miracle, but some market participants interpreted the news as an indication of a “higher for longer” interest rate environment. This also means mortgage rates can be elevated if they don’t negatively impact the economic data. 

3. The Fed has a small margin of error in its unemployment rate forecast for 2025. This ties into my discussion on a recent episode of the HousingWire Daily podcast about the wildcards for housing in 2025. I also wrote an article on this topic today, The Federal Reserve’s housing recession dilemma, and the timing couldn’t be more perfect. The Fed is now playing with the Krampus Fire with elevated mortgage rates and the housing starts data. The Fed can’t afford to lose any sector of the economy to maintain its restrictive stance, which makes me believe they have intentionally set a low bar for 2025.

What a crazy day! Everything was calm but the markets weren’t ready for the Fed statement or press event. I jumped on the HousingWire Daily podcast right after the Fed press conference ended, so catch that episode tomorrow as we go over the Fed press event with more detail. While we were recording the podcast, the stock market continued to decline, but bond yields maintained their upward movement, making higher mortgage rates a 100% certainty. Merry Christmas, everyone.