Rates Back to 20 Year Highs as Economy Remains Resilient
The resilience of the economy is a matter of debate with different cases to be made depending on the data. But when it comes to the Fed’s favorite reports, the data hasn’t given them any reason to go easy on rates. The Fed doesn’t directly dictate mortgage rates, but it does set the Fed Funds Rate, which has far-reaching effects. Financial markets can also bet on the future level of the Fed Funds Rates via securities unsurprisingly named Fed Funds Futures. This allows the market to constantly adjust whereas the Fed only makes changes on a scheduled basis, 8 times per year. Here’s how the implied Fed rate has shifted recently for the December 2022 and June 2023 Fed meetings: The Fed Funds Rate only applies to the shortest -term lending, which is one reason it’s not always highly correlated with mortgages (which tend to last 5-10 years on average. Longer term rates can move in very different patterns compared to short-term rates. But longer-term rates often line up much better with those longer run Fed rate expectations as seen in the green line above and below. The next chart shows the June Fed Funds expectations overlaid with 10yr Treasury yields (a quintessential benchmark for longer-term rates in the US). Not a perfect match at all times, but highly correlated in the past few weeks. For even better correlation , we can compare Treasuries and mortgage rates which, as of Friday, moved back up to the highest levels in 20 years.