Market update: Fed sticks with low rates as inflation spikes
Federal Reserve Chairman Jerome Powell signaled the Fed will maintain its position on historically low interest rates as the U.S. economy continues to recover from the pandemic. On Wednesday morning, the Fed Chief told Congress that the economy is “a ways off” from where it needs to be for the central bank to begin increasing rates.
PPI and CPI surpass expected increases
For years, the Federal Reserve’s policies focused on its mandate to both maintain price stability and sustain maximum employment. In recent years, the Fed’s practices have moved outside the scope of that dual mandate and incorporated more elements of crisis management.
For example, the Fed is continuing to maintain historically low rates while inflation is seemingly left unchecked. On Wednesday morning, a report on producer prices showed a rise in the cost of raw materials. Producer Price Index (PPI) month-over-month grew by +1.0% vs. an expected +.8%. The annual pace increased to +7.3% vs. +6.6% the previous month. Consumers are also feeling the pain; the Consumer Price Index (CPI) month-over-month grew by +.9% vs. economists’ expectations of +.5%. On an annualized basis, consumer prices are up +5.4% vs. economists’ estimates of +4.9%.
Market approves of Powell’s comments
While consumers and producers are both paying higher prices, corporate profit margins are also being squeezed, which could have other negative consequences on the COVID recovery, particularly on hiring. Supply-chain disruption continues to be a factor; anyone who has been shopping for almost anything or needed work done on their home has experienced this first-hand.
For now, the markets appear to be trading along with the Fed. The bond market loves Powell’s commitment to keeping rates low. Since reaching a high of 1.76% on March 30, the yield on the U.S. 10-year note has fallen to 1.35%. Mortgage rates have fallen over recent weeks as well, with the average 30-year fixed rate falling to about 3.0% from around 3.375% back in March, according to Bankrate.com. Stocks seem to like the dovish talk by Jerome Powell as well, with all major indexes posting modest gains in the wake of his testimony to Congress.
Jeremy Collett is Guaranteed Rate’s Executive Director of Capital Markets. Market Updates are designed to provide readers with a high-level yet insightful view of how economic news, events and trends affect mortgage rates and the homebuying process.