Life comes at you fast. During this Thanksgiving week, we went from higher yields and the first Fed rate hike storyline to a big drop in bond yields and scary headlines on a new COVID variant, Omicron. How do we make sense of all this? In this type of economic environment is it even possible for mortgage rates to get to 4% and can the Federal Reserve really hike rates in an aggressive fashion?
Let’s take a look at all these topics together.
Federal Reserve first rate hike?
Those who follow me on social know of my take on the first Fed rate hike and what needs to happen for this conversation to really take place. My rule of thumb has always been when working from a zero interest rate policy, the 2-year yield needs to be above 0.56% to have an honest discussion about this. Recently, that milestone was finally reached — only to be taken off the table with this new news about Omicron.
Here is the 2-year yield before the headline on the new variant:
Currently, the 2-year yield has fallen and is 0.50%. Expect a lot of volatility with bond yields. However, if the 2-year yield is above 0.56% and can rise toward 80 basis points, the first rate hike is on. The other data line to know when the first rate hike is legit is that typically the U.S. dollar makes its biggest percent move higher within the new economic expansion before the first Fed rate hike and it is making a move currently.
The dollar has been making a move higher, but nothing too spectacular yet. I know some are in the camp that would believe that if the dollar gets too strong then it can crush commodity prices, much as it did in 2014-2015 with oil prices. >>>Continued on HousingWire.com
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