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Mortgage rates increased slightly this week after rallying lower to start the year. The Federal Reserve is looking to increase interest rates at their next meeting on Tuesday and Wednesday. Expectations are that they raise the Fed Funds rate by 0.25%, which mostly impacts short-term loans and does not directly impact mortgage rates.

 

The Fed Chairman is expected to give guidance on Wednesday that they expect they will continue to raise rates at a slower pace and keep rates higher for longer. We expect something close to this to happen. The thing to remember is that the Fed can be wrong in their forecasts, as they kept rates too low in 2021. Now they have been playing catch-up with ultra-aggressive rate hikes in 2022, I believe the Fed would like to keep rates at these high levels to make sure that inflation comes down.

 

Having interest rates at levels this high weigh down the economy and we have already seen weaker than expected spending data from consumers in January, along with inflation coming down the last several months. The reason the Fed has not declared victory on inflation is that the labor market is still very tight with the unemployment rate below 4%. A tight labor market will keep wages high and may keep inflation higher than the Fed wants.

 

Before the Fed slows down and declares victory on inflation, the labor market will need to loosen up a bit. When this will happen is the question that I think about, along with the rest of investors and traders. For the time being rates are in a state of uncertainty as the market waits to see if the Fed is right and we will have rates higher for longer, or if the economy cannot handle the high rates and we see a sharp economic slowdown.

 

• Mortgage Applications rose 7.0% this week

• New Home Sales for December came in above analysts' expectations (616k vs expectations of 612k) and is up 2.3% m/m

• GDP for Q4 came in above analysts' expectations (2.9% q/q vs expectations of 2.6% q/q)

• Durable Goods Orders came in higher than analysts' expectations (5.6% m/m vs expectatins of 2.5% m/m)

• Initial Jobless claims came in under analysts' expectations (186k vs expectations of 205k)

• US 10-year Treasury closed at 3.50% on Thursday afternoon