The Fed Abides, Hikes Rates Another 75 BipsJuly 27, 2022
As projected, the Federal Reserve has just announced another rate hike of 75 basis points or three-quarters of a percent for federal funds, its second 75 basis point hike in as many months, which was an unprecedented move.
As we foreshadowed at the end of last year, the higher federal funds rate has pushed the 10-year treasury and mortgage rates up, which is translating into “less purchasing power for buyers, fewer sales and downward pressure on home values,” as projected.
And on top of today’s rate hike, the majority of which was likely already priced with respect to the prevailing mortgage rates, the probability of the Fed raising interest rates by another full percentage point by the end of the year is now running around 70 percent. We’ll keep you posted and plugged-in.
Comments from Plugged-In Readers
dudeFed is also methodically plugging the liquidity gusher of quantitative easing, ZIRP’s companion in the monetary policy guide to transferring wealth from workers to the .01%. The demise of ZIRP and QE spell the end to the current cycle of Ponzi asset bubbles (real estate, insanely-overvalued stocks, cryptostupdity, and of course, profitless self-seasoning pizza-delivery app startup unicorns).
Stocks way up on the news (also strong earnings from Google and Microsoft) and 10-year interest rates are down on the news, with 2-year unchanged.
Bipartisan infrastructure and CHIPS bills expected to add around $800 billion in new spending authorization, much of that to tech. Those (oddly) hoping for a severe downturn in the bay area are going to be disappointed. Which is good.
Amazing how swindle… excuse me, spending… hundreds of billions of our money on insanely wealthy corporations instead of American citizens is always labeled as “saving” the economy, while the reverse is always narrated as recession and inflation causing.
And a fraction of that amount spent on direct aid to lower-income classes is communism and TEOTWAWKI…
Have you been paying attention to stock market behavior after the recent interest rate moves? After the last several hikes, stocks immediately jump 1%-2%…and then dive. This isn’t an obscure phenomenon. Crypto is also up. Jump in!
You’re conflating multiple historic asset bubbles with a healthy economy. What you might consider a “severe downturn,” would be a boon to those who don’t benefit from Ponzi asset bubbles. But the .01% usually gets its govt bailout when the well runs dry, so you may be right.
If there is a severe downturn, it will disproportionately harm the lower classes. They always do. Wishing for such a development is just bizarre and cruel.
You can’t fight the fed. Good luck trying to talk up the market with your compassion for the lower classes.
Ah, yes, the lower classes should be grateful for their immiseration caused by policies that benefit the .01%. “Be grateful for your crumbs, proles; any attempt to curtail our wealth and power will only make your worse conditions worse.” Talk about “bizarre and cruel.”
Obviously the lower classes take the brunt in downturns; they are closer to the bottom, so a small drop can be catastrophic. Hence, the “precariat.” Our political economy is run by Sadists, for Sadists. The system is rotten, but there are other systems that are far less “bizarre and cruel.” History shows that sadistic systems don’t end well for anyone, least of all the ruling class..
Which lower classes are you referring to? In Mexico? South America? Canada? Botswana? The worst thing about reprobates is they miss all the fun of a great market economy where miracles happen every hour. Instead they just stay frozen in the unchanging cynicism their privilege provides for.
@ unlivablecity – how crass. How about the underclass right here, the 90% or more of the US population struggling to get by, whose wages have not kept up with inflation (nor productivity increases) … all while the neo-robber barons pay soars to stratospheric heights (or should I say to outer space, a la Bezos and Musk joyrides in rockets while millions struggle to buy groceries and pay simple medical bills).
And “they miss all the fun of a great market economy”?! You’re just illustrating @two beers’ point; 90% of the population *can’t* get in on economic growth because they have no net assets or liquidity. Something something the rich get richer….
I love it, unloveable! I get it now that you’ve explained it so lucidly: the underclasses deserve to suffer, as they are spoiled lazy by the privilege of precarity, as opposed to the asset-boosting ZIRP and quantitative easing that the upper classes earned with the sweat of their own toil. Hallelujah, I’ve seen the light!
“Obviously the lower classes take the brunt in downturns; they are closer to the bottom, so a small drop can be catastrophic.”
Precisely. Thus, hoping for a severe downturn is pretty bizarre. Regardless, my point was that is not going to happen in the bay area any time soon. Sorry to disappoint.
IOW, “be thankful for your suffering for our benefit now, losers, because if anything in the least bad happens to us as a consequence of our own profligacy and corruption, woe betide you.”
Impeccable classism, that.
Nobody’s building out fabs in the Bay Area, pretty much all the investment Dollars are going elsewhere. Intel already committed $20b of their own money to build new fabs in Ohio. CHIPS funding might take that to $100b one day, in a combination of what Intel brings and what CHIPS brings.
No-one is hoping for a severe downturn. It’s just that a downturn/recession is the likely cost of taming inflation. A lesson from the 70’s is that the real choice isn’t whether or not you’ll pay the cost , the real choice is if you’ll pay that cost only once or end up paying over and over again. If the Fed gives up too early we’ll get all the economic “cost” of a hit to the economy without the benefit of finishing off inflation.
It’s like being prescribed antibiotics and deciding to stop taking them midway through the full course because you don’t like the side-effects. Only to have the infection flare up again with an increased resistance to antibiotics.
The Fed’s credibility with the markets is a key part of its power and if it acts ineffectively its credibility will be reduced which will require more forceful actions and an eventually more severe downturn to fight inflation in the future.
As a point of context the Fed’s target inflation rate is 2% and the last inflation read was 9.1%. We’re way above target and I think you need to be realistic about what it’s going to take to bring inflation back under control. Nobody wants the side-effects but it seems very unlikely that we’ll be able to avoid them.
I’m looking at houses in the 500-600k range (outside Bay Area obviously) and the effect that these small rate hikes make on a mortgage like this compared to a $1-1.5 million home is pretty severe. With 20% down, a 1 % rate increase, from 5% to 6%, comes out to about $200 more/ month for a 550k house but about $1,000 more for a $1.5 million (which is pretty entry level for Bay Area, LA and San Diego).
This seems like it could have greater effect on those $1-2 million home sales than anything else.
Absolutely. My 2010 mortgage (modest by SF standards) was a 50% greater monthly payment than with my 2021 refi. Not a flex, just illustrating how important these changes can be to buyers.
This does presume that the 1.5 buyer is more sensitive to a 1000 per month increase than a 550k buyer is to a 200 per month increase. And of course by your logic there should be no sales above 5 or 10 million dollars if sensitivity increases with monthly price increases. I’m not sure that’s the case, but I suppose Case Schiller shall reveal all in a few months time.
That is $12,000/ year. Buyers at 1.5mil could probably swing that, but some would need to downsize other assets, or spend less, to offset. Bottom line, less cash flowing in the economy, causing ripple effects.
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