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Last week’s FOMC meeting should have provided the financial markets enough information to stabilize and coast, at least until the July meeting. However, Federal Reserve Chair Jerome Powell’s two-day testimony before Congress this week sent the markets into another tailspin. The Chair maintained the FOMC’s commitment to bring down inflation by lowering consumer demand with higher interest rates. However, Powell also raised the possibility of a recession, noting that orchestrating a soft landing is “very challenging.” The more the “R” word was mentioned, the more skittish the equity and bond markets became. The fear of recession began to overtake the fear of inflation. Even as Powell reiterated his commitment to fight inflation unconditionally and his belief the economy can handle higher interest rates, Treasury yields plummeted as investors sought safety amid growing economic uncertainty.
Key Indicators this Week
Housing – Housing market activity was split in May. Sales of existing homes fell 3.4%, the fourth decline in a row. The number of closings was the lowest in almost two years. Inventory increased slightly, but demand was still strong. Properties were on the market an average of 16 days, the shortest time on record. At the other end of the block, sales of new homes unexpectedly increased 10.7% for the first gain this year. The jump in sales likely reflects buyers rushing to lock in a mortgage rate before borrowing costs increase further. Prices for both existing and new homes are about 15% higher from a year ago.
Sentiment – The final tally for consumer sentiment this month was worse than the early estimate. The University of Michigan’s sentiment survey measured 50, an eight point drop from May and the lowest measure on record. Consumers expressed the greatest level of concern about inflation since 1991. Close to half of the respondents had bleak views regarding unemployment or risk of recession.
Strategically for Credit Unions
The Fed has raised the fed funds rate three times this year and plans to continue raising the rate a few more times. Suddenly, this is presenting a conundrum for investors. Early in the year, the promise of higher rates kept most investors on the short end of the curve waiting for the Fed to begin its moves. No one wanted to jump ahead of the Fed. Now, after 150 basis points of rate moves, investors are wondering what to do. We have been told the Fed will continue raising rates, but the Treasury market is looking at recession sooner than later. Treasury yields are an average 40 basis points lower than before the Fed made its last move. The curve is 24 basis points flatter from earlier in the month, currently hovering around seven basis points. Even as the Fed continues to raise the benchmark lending rate, longer-term yields – anything beyond two years – are relatively the same. Now may be the time to alter your thinking about waiting for higher rates. Those rates may already be here. Inching out on your ladder and locking in close to or over 3.0% will give you higher current income, as well as some cushion if a recessionary environment hits before inflation falls.
Note: Behind the Numbers will not be published next week. The report, along with the July Market Data and Overview Report and CU Rate Survey will be published July 8. I would like to wish everyone an early happy Fourth of July holiday.
Sarina Freedland – Senior Investment Officer
Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. This is for informational purposed only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.
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