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April 5, 2024

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April 5, 2024

Is This the “New Normal” for Rates?

Market Update

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Last week was inflation data, and this week focused on jobs data. We ended the week a little bit over 7%. When will rates actually start to decline? Unfortunately, we might need to get used to the current rates

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Inflation is the key to getting lower rates. The Fed has targeted 2% as the ideal inflation rate for decades. Last week, we made little progress on the inflation front, and there are no signs in the upcoming data that inflation will drop quickly.

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Jobs and the economy are also a big driver of inflation. When people have jobs, they spend money. When people spend money, the economy is generally pretty good. When the economy is good, more goods and services are needed, and inflation tends to increase.

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This week's job figures from both ADP and the Bureau of Labor Statistics (BLS) both came out better than expected. The unemployment rate actually declined.
When the Fed sees this data, they surmise that inflation will go up, and it then becomes a waiting game to prove or disprove their assumption. It could take a period of time, even months, before we actually see where the economy is going.

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While many of the job gains were in part-time jobs, second jobs, and lower paying jobs, it still shows growth.
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Thus, the waiting game continues. Unless there is a drastic jobs report showing jobs and the economy are tanking in the next couple of months, rates will likely be at this level for quite a while, likely high 6% / low 7%.

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At the beginning of the year, it was projected that the Fed would make three rate cuts to the federal funds rate this year. That has now been reduced to two rate cuts. And who knows? It might only be one this year if continue to see further job strength.

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The Fed is also very cognizant of being in a presidential election year. They want to maintain their non-biased, stand back approach, politically. Thus, as we get closer to the election, it is highly unlikely the Fed will make any drastic changes to their Fed policy to sway the election to either party. As we get closer to the election, there may not be that many rate cuts. The next Fed meeting is May 1st. We are in a waiting game to hear their take right now.

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However, there is good news for homebuyers: These elevated rates should keep home prices from skyrocketing. While frustrating and annoying, buyers who qualify should still consider going forward with their purchase. For sellers looking to move up, they may make a little bit less money on their home now, but they should definitely save on the new purchase before prices go up when rates eventually do come down.