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January Inflation Cools; Eyes Turn to Fed’s Next Meeting

January Inflation Cools; Eyes Turn to Fed’s Next Meeting

Good news about inflation and a strong jobs report is being read by some as bad news that the Federal Reserve could add another interest rate hike or more significant increase next meeting

The consumer-price index (CPI) cooled slightly in January, yet, in the rate announced on February 13 there was still a YoY increase of 6.4%. This annualized climb was down slightly from 6.5% in December 2022, which, in itself is good news as the February 2023 figures marked the seventh straight month of slowing inflation since hitting a peak of 9.1% in June 2022 (the highest reading since 1981). Again, good news!

However, the cooling trend is moderating (AKA, “bad news”), and this past relatively-strong inflation report could force the Federal Reserve to further raise interest rates at the central bank’s March 21 – 22 meeting.

The usual signs of a potential recession continue to stump economists. The US economy’s resilience apparently knows little bounds. Jobs are plentiful as the jobs report from December showed 11M job openings, which is a far greater number than the total amount of people currently unemployed (5.7M).

Despite what some experts are claiming is a “looming recession,” consumers continue to show robust demand for household goods, which is one factor that’s keeping inflation elevated. And all this hot consumer-buying is putting pressure on the Federal Reserve to keep raising interest rates.

Speaking of that, retail sales rose last month by the most in almost two years, according to recent reports. Combined with CPI report, the Fed may attempt to rein in consumer enthusiasm as recently Goldman Sachs increased its peak fed funds rate to 5.25% to 5.5%. “The economy is generally performing better than expected,” said Bill Adams, chief economist for Comerica Bank. “These data collectively make the Fed more likely to surprise to the upside (in rates).”

Meanwhile, is this consumption a fake narrative of consumer stability?

So, how are U.S. consumers buying all of this stuff? Well, they’re putting more and more on their credit cards in 2023. Numbers recently released show record highs of $986B according to the New York Federal Reserve Bank. Now, this could mean consumers are using ‘plastic’ to keep up with the Joneses, or much worse, simply to live and provide their families with the basics. Meanwhile, real wages were down 0.9% YoY.

The 30-year fixed mortgage rate is a breath away from surpassing 7% (again)

Fluctuating 30-year mortgage rates — which fell to as low as 2.65% in 2021 and climbed to as high as 7.08% last year and just went over 7% at 7.01% according to Bankrate as of February 28, 2023 @ 3:15PM ET — is the determining factor in the trajectory of the US housing market. Buyers may perceive this 7% rate as significantly more expensive than 6%, explained Ralph McLaughlin, chief economist at real estate start-up Haus. The actual difference is not that much, only $40 on a $300,000 loan. McLaughlin believes, rather than perceiving the high interest rates as out of reach, he sees the small difference as a necessary step toward bringing the real estate market back into balance.

While the long-term rates were back on the rise, the Mortgage Bankers Association (MBA) — the largest trade association for mortgage bankers — is forecasting a drop to 5.2% by the end of 2023 and as low as 4.4% in 2024.

But as rates climb further and further away from 5.2% and now have surpassed 7% again, will The MBA have to revise its projections as time until the end of 2023 draws closer and closer?

The renewed rise of mortgage rates caused more potential buyers to stay on the sidelines. The MBA’s Purchase Composite Index, a measure of all mortgage loan applications for purchase of a single-family home, dropped 18.1% from the week earlier to its lowest level since 1995.

All of these factors mean recession is still likely in late 2023

The strong jobs report reduces concerns that recession is imminent, according to Gus Faucher, chief economist at Pittsburgh-based PNC Financial Services Group Inc. “Sales of motor vehicles and parts jumped almost 6% as supply chain problems continue to ease, and despite higher interest rates on car loans,” Faucher noted. Sales of home furnishings were up over 4% and restaurant sales surged more than 7%. “This category is more discretionary than some others, so the increase is evidence that consumers are still feeling confident,” Faucher said of the restaurant data.

The Fed remains concerned about inflation

Although inflation appears to be on the decline from recent highs, the Fed is still concerned that inflation is well above their 2% goal. So, the Fed is expected to raise rates again on March 22. But, the real question is: will The Fed continue to raise rates for at their next subsequent meetings in May and June or possibly do a 50 basis point increase in March as opposed to the more expected increase of 25 basis points. Stay tuned.