Inflation isa hot topic, whether it is in the press, the gas pump, or at the restaurant. Throughout2023 so far in 2024, inflation readings have taken priority over weekly and monthly economic news, and are influencing the Federal Reserve’s actions, and also influencing mortgage rates. What should Orion’s brokers know about what is happening?

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First, brokers should remind their clients that inflation has been coming down, and that helps lower interest rates. The Fed’s monetary policy works with lags of12-18 months before the impact of rate changes are fully felt. Inflation at the consumer level, as measured by the Consumer Price Index, hit its peak in the summer of 2022 and the Federal Reserve raised short-term rates. To reduce inflation two years ago, the Fed would have had to (among other things)anticipate the severe supply-chain problems we were experiencing and would have had to start raising rates soon after the initial lockdowns of March/April 2020to keep inflation subdued. This was, and is, impossible.

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Both consumer and producer prices continued through 2022 and 2023 at high levels. This added pressure on the Fed to act more aggressively despite the market being worried about a slowdown in growth. As the pandemic subsided, risks to grow over the near term and inflation slowed seasonal demand strength gave way to seasonal weakness.

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Inflation has slowed enough that Orion’s brokers should know that, despite rates actually chopping around some, the market is fully priced in for a rate cut on September18 for fed funds (what banks charge each other for overnight money) and Discount Rate hike. The question that economists will jawbone about is, “Will it be 25 or 50 basis points?” The Federal Reserve does not want to over react and create a situation where the economy picks up too much steam or inflation is pushed higher. The “narrative” is that the Fed is already responding to inflation levels, which in turn should help restore its credibility and deflect any future criticism and/or political pressure.

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Brokers should also advise their clients that lowering rates in Q3 and Q4 of 2024 would likely require the Fed to either alter the guidance of "broad-based and inclusive employment," or somehow fudge the definition of maximum employment and convince the public that the goal has been reached. So, there is little reason that the Fed would want to lock itself into any kind of “loosening” path. So Federal Reserve officials intensified their battle against the hottest U.S. inflation in a generation by moving to end their asset-buying program earlier and signaling they favor raising interest rates in 2022 and2023 at a faster pace than expected.

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The Fed’s plan has worked. Mortgage rates have gradually come down, and forecasts are now that mortgage rates may drop into the low 6’s or even high 5’s for 30-yearrates as we head toward the holidays. Please ask Orion’s AEs about some new products that can help your borrowers regardless of interest rates.

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