Economic Insider

The Feds has a Critical Role in Market Prices

Throughout its century-long existence, the Feds has played a vital role in determining the mood of the stock market and market pricing.

The Central Bank has quickly warned that the economy would tighten as the nation fights against inflation this year. Sadly, a tight economy indicates the Fed will attempt to take action to ameliorate the situation. Undoubtedly, the pandemic has had a negative economic impact on the world, resulting in tight labor markets, higher commodity prices, fewer open positions, lower pay, and other adverse economic dynamics. For instance, to calm the market, the Fed had to raise interest rates, which caused changes in mortgage rates.

“I think they know they gambled and lost and have to do something serious to get inflation back under control. I fear that they took a gamble that inflation wasn’t too real at the beginning of 2021,” said Notre Dame University economics professor Jeffrey Campbell.

The Feds’ policies have become tighter, frequently characterized by an aggressive approach to economic variables. But, according to Feds Chairman Jerome Powell, the Feds will maintain strict measures as long as they combat inflation in the United States.

“Their message is that we should expect them to remain in restrictive policy mode even after we start to see inflation data head in the right direction. So he went to pretty extensive lengths to dispel assumptions of any pivot coming forward soon,” said Keith Buchanan, Globalt Investments portfolio manager.

“It would be sufficient for them to acknowledge that the near-term rate is trending in the right direction, but, definitely, they should not allow that to [influence] their trajectory. The real dilemma is, how much good data do they need in hand before they pause?” said Brad Conger, a deputy chief investment officer from Hirtle Callaghan.

“Given current rates of inflation, I believe that the Fed has more work to do in order to get inflation under control. This will entail further rate increases to tighten financial conditions,” added Cleveland Feds Bank President Loretta Mester.

“Our responsibility to deliver price stability is unconditional. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said.

“The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” the Chairman added.

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Feds impacting mortgage rates

Mortgage rates, fortunately, have been falling in recent months. As a result, demand for mortgage applications has inevitably grown. However, because prices are still considerably higher year over year, many buyers believe they must wait for the economy to improve—buyer hesitancy puts pressure on many house sellers and home builders. As a result, in November, home construction in the United States slowed.

“The ongoing moderation in home-price growth, along with further declines in mortgage rates, may encourage more buyers to return to the market in the coming months,” said MBA economist Joel Kan.

“A friendly enough Fed could easily break the range, but we have doubts about how much fuel the Fed will want to add to the fire. If anything, the Fed is more likely to try to temper the exuberance. Because the exuberance is counterproductive to the Fed’s goals,” added Matthew Graham, Mortgage Daily News chief operating officer.

“There are some very, very modest green shoots over the last few weeks, as rates have come down, but I am not ready to get sucked back into the conversation we had in August when we felt better,” said the CEO of Toll Brothers, Doug Yearley.

“There have been a handful of pieces of relatively good news for the housing market lately, but we’re far from out of the woods. Key indicators of homebuying demand will likely be teetering on a knife’s edge with every data release that comes out related to the Fed’s path to eventually bringing rates down,” added economist Taylor Marr from Redfin.

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Fewer home-building projects

The Fed’s shifting interest rates have dampened house builders’ spirits. The pace of new home construction fell in November. While the market’s house inventory is larger than last year, prices remain high. This implies that many purchasers will put off their purchases.

“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the Covid-19 economic lockdowns in 2020,” NAR chief economist Lawrence Yun said.

“The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows,” he added.

“We have seen home prices come down from their summer peaks over the past five months. But, at the same time, we have also seen rent growth retreat for ten consecutive months,” added George Ratiu from

“However, the cost of real estate remains challenging for many households looking for a place to call home, especially as high inflation and still-elevated interest rates have been eroding purchasing power,” he added.

Photo Credit: The New York Times

Source: CNBC


Opinions expressed by Economic Insider contributors are their own.