Powell sends mortgage rates higher as he questions December cut

The Federal Reserve cut the Fed funds rate today but mortgage rates shot higher. This was not shocking to me as yesterday I wrote about whether Powell would ruin the year’s lowest mortgage rates with his remarks at the Fed press event — and that’s exactly what happened.

When mortgage rates are near 6% and bond yields are at yearly lows, that’s when Powell tends to get hawkish, so the backdrop for him to be a Halloween hawk was too good for him to pass up. 

Mortgage rates rose by 14 basis points after Powell’s remarks. The market was anticipating a near-100% probability of a rate cut at the next Fed meeting in December and Powell wanted to push that notion off the table. The language he used was: “December rate cut is ‘NOT a foregone conclusion.”

No December rate cut?

The biggest takeaway from the Federal Reserve’s press event was that Powell did not fully endorse a rate cut in December. While the market still expects a cut, his response is typical of Powell, particularly when the 10-year yield is near its yearly low. He aims to manage market expectations, for reasons I still don’t endorse, because the labor market is clearly getting softer.

Powell could have had an easy layup today, but that’s not his approach. As a result, markets are pricing in the December rate cut with less certainty, but for now, they still expect it. If the 10-year yield was at 4.50% and mortgage rates above 6.64% I don’t think Powell would have disappointed people today, but with the 10-year yield recently under 4% and mortgage rates at yearly lows, he was going to take his shot to push the market back.

Labor data isn’t  breaking

Powell also made sure to let everyone know that the labor market isn’t breaking, and he used his two favorite data lines to prove it. Both job openings and jobless claims data are still showing a labor market getting softer but not breaking. 

How can he make these claims with no government data on jobs? We do have private-sector labor reports and the states have data on their jobless claims — and all it shows is a modest increase recently. I know this sounds crazy, given how low job growth has been, but Powell really puts a lot of weight on the labor force growth falling as the main reason for the slowdown.

Mind the chart below: manufacturing jobs have been declining since late 2022.

Construction workers are also losing jobs.

Housing permits are in a recession, and have been for a while, and this has nothing to do with labor force growth.

Back in 2022, I said the labor market needs to break for the Fed to get dovish. This means getting away from the Fed’s favorite talking point —that it is modestly restrictive, which Powell referenced again today.

Simply put, Powell clearly doesn’t believe we have enough labor pain to take the easy lay-up today and take a dovish tone in his statements, which actually aligns with his mindset. Remember, this is a man who months ago said the labor market was solid, only to back off that weeks later.

Conclusion

Tomorrow’s episode of the HousingWire Daily podcast will cover the entire Fed press event in more detail but Powell acted right on cue for me. So many rate cuts have been priced into the market that he had to try to push back the December rate cut today. My belief, as always, is that the Fed needs to see more pain in the labor market before it will shed its modestly restrictive stance and get anywhere near an accommodative mode.