February — If I Had to Bet On The Markets I Would…

As the calendar turns to February and we look back on the first month of 2022 economically—it ended almost identical to what we had expected.

Mortgage rates are trending upwards, stock markets are volatile, and the Federal Reserve confirmed that they will start hiking the Fed Fund and Prime rate.

The only thing that changed is the Fed is now expected to increase rates beginning in March 2022 compared to May 2022.

There has been a ton of speculation and predictions being made about how the Fed will handle the hikes. Some economists suggest 3 rate hikes of 0.25% per time, others think the Fed will start off strong and hike rates 0.5% for at least the first and second hike, while Bank of America analysts are projecting seven rate hikes of 0.25% per time.

I personally think a more realistic situation is that we see the Fed hike rates 4 times this year at 0.25% per time. Until the Fed’s policy is finalized it’s anyone’s guess but that leads me to believe that February will be another month of speculation and volatility on Wall Street.

Are Interest Rates Going Up?

At the most recent Fed meeting, Fed Chair Jerome Powell stressed how strong the economy is and that their focus will be on reducing inflation. He also said that he has no control over the yield curve (10-year Treasury note), which if we read between the lines, it appears he plans on going full steam ahead on rate hikes to try and kill inflation even if that ends up flattening the yield curve and send the US into recession like it historically has.

While it’s counterintuitive, I believe that as the Fed starts to hike rates we’ll see mortgage rates go down. As I’ve mentioned before, inflation is the enemy of mortgage rates, the higher inflation is the higher mortgage rates go. With the Fed trying to kill inflation that effectively means a ripple effect will be that mortgage rates should go down.

The only thing the Fed did not comment on, which will be a key factor on mortgage markets, is once the Fed starts hiking rates will they also start reducing their balance sheet? If the Fed reduces their balance sheet this could be bad for mortgage rates and send mortgage rates up.

I’m fairly confident that they will start reducing their balance sheet, but the question will be by how much? The Fed was silent on this in their last meeting.

If I was a betting man, I would bet on the US experiencing a recession this year and stock markets seeing a 20% to 30% decline at some point. The question in my mind is how long will it last? I bet most of you didn’t realize that we actually had a recession in 2020 but since it only lasted 2 months many Americans didn’t even know we had one since it wasn’t long enough to truly impact our daily lives.

Will the 2022 recession mirror the 2020 one, or will it be more like 2008 and 2009? Only time will tell and with this much uncertainty going on our message remains the same about locking in rates now because the bird in the hand is worth more than two in the bush. We still feel good about home prices rising and will be sending out another message on what we see happening to home prices in 2022.

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