On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about the Fed meeting and what to listen for when it comes to Fed policy and mortgage rates.
Related to this episode:
Why this week’s Fed meeting is critical for mortgage rates | HousingWire
https://www.housingwire.com/articles/why-this-weeks-fed-meeting-is-critical-for-mortgage-rates/
Enjoy the episode!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.
Related to this episode:
Why this week’s Fed meeting is critical for mortgage rates | HousingWire
https://www.housingwire.com/articles/why-this-weeks-fed-meeting-is-critical-for-mortgage-rates/
Enjoy the episode!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.
Category
🗞
NewsTranscript
00:00Welcome, everyone. My guest today is lead analyst Logan Motoshami to talk about what to look for
00:11in the Fed meeting today. I want to thank our sponsor, Rocket Clothes, for making this episode
00:16possible. Logan, welcome back to the podcast. It is wonderful to be here in beautiful Boca
00:22Raton. And you're wearing like a thick sweater, it looks like. Yes. My, you know, my voice.
00:32Here I realize when I was coaching high school basketball, I was constantly yelling and screaming
00:37just to get the kids to do the right thing. I was never yelling at the refs. But if you're ever
00:43talking about economics and you don't have a mic and you have to project out and you have to do a
00:49whole presentation within 20 minutes, you are just pushing the limits of your voice because
00:56you're projecting out as high as you can. So I'm trying to keep as warm as possible so I could speak.
01:05Oh, okay. Okay. This makes sense. I'm like Boca Raton, not exactly cold. Okay. We have a lot to
01:11talk about. Fed preview day. It is, when this goes live, it'll be Fed day. There's been a lot going
01:18on and you think that it's not so much about, it's not like you're expecting him to lower rates. It's
01:23in the Q&A. So let's talk about what you're looking for. So this is the fight now. So we take
01:30the first four months of economic data and we just throw it aside because now we're entering a whole
01:37different phase of this cycle. And what the Federal Reserve has talked about already is
01:43Powell doesn't seem like he wants to do preemptive cuts until he sees the labor market breaks. This
01:51is different than my labor over inflation talking point because he feels that the size of the tariffs
01:59are big and he doesn't want to ease monetary policy going into that because he believes inflation can be
02:09more persistent in that environment. This is kind of what they saw during COVID. So they've raised their
02:17inflation expectations. All the inflation data that we've dealt with before is irrelevant. It's what's
02:23going to go out in the next 12 months. Then there's Fed presidents who've already said, we want to front load
02:31rate cuts to kind of get ahead of this damage so that now it gets interesting for every Fed meeting
02:41now is going to get more and more interesting depending on what the data says, because it's
02:46already kind of too late. Even if we did trade deals in the next week, we're going to get some of
02:51the impact of not having the global trading system work. So we're going to go into this thinking,
02:58is, is, is Powell going to say, listen, I'm not cutting until we cut rate until I see labor market
03:05breaks, or as soon as we see things getting weaker, we might try to get ahead of it to help our dual
03:12management. I think that's the, what we want to hear. Are they going to let the recession happen
03:18to combat this type of a shortage, or are we going to basically try to get ahead of it? And that's the
03:26battle between Trump and a few Fed presidents and Jerome Powell and other people that have his
03:32mindset. So from your perspective, what is the best route? What, what's the best scenario for us to get
03:40lower rates? Is it that the labor market breaks? Is that the fastest thing? Is it that we go into a
03:44recession? Like what can people think if they want lower rates, what is that best path?
03:48It goes back to this second article that I wrote for HalseyWire. Economic data outperforming. The
03:57estimates about where the bond market should be with Fed policy means yields can stay elevated.
04:03The last few days are a great example. Since last Thursday, we've had a series of economic data beats,
04:1010-year yield rose. We're at the 435 level today. This is Tuesday morning. This looks about right to me.
04:15But if you saw economic weakness and the Fed starts talking about, okay, well, we want to kind of,
04:22you know, take away our moderately restrictive policy and get something more neutral. See,
04:29the whole argument has been about how to get to neutral policy. We've never dealt with,
04:34oh, the labor market's breaking. What do we need to do if the labor market's breaking? This is why the
04:38next 12 months are going to be very interesting. Because even President Trump has talked about, well,
04:43you know, if we have a recession, you know, it's short term, something like that. Everybody's kind
04:48of gearing up for this event. It's how you deal with this event. And Waller and some other people
04:54have always talked about, hey, if the labor market is breaking, we want to get preemptive rate cuts in.
04:59If there is no labor market breaking, if we have inflation and the economy stays stable,
05:05right, with no job loss, that means rates can stay elevated for a longer period of time until
05:11the trade war situation deals itself. But here, we just want to get a clue on what's his threshold,
05:21right? And to me, it's just from what Powell has talked about, it doesn't seem like they want to get,
05:28he doesn't want to talk about preemptive rate cuts on something that could happen.
05:32But we want to hear, okay, if you start to see jobless claims break, what are you going to do?
05:39A few times, the bond market tries to get ahead of the Federal Reserve. I mean, they always try to
05:43get ahead of the Federal Reserve. But in this, in the past few years, they really have, like last year
05:48was a great example. We broke the borderline for a very small amount of time because the bond market
05:54was assuming that labor market was breaking, the Fed had to share it. That didn't happen. So
05:59any kind of clues about, well, we will try to help the economy if the labor market is breaking,
06:06any kind of direction into that can be received well. What you don't want to hear if you want
06:13lower rates is, by the way, we're not going to do anything until we get an idea of where the policy is.
06:19And even if the labor market starts to show weakness, we want to stay moderately restrictive
06:25because, you know, our job is to make sure inflation doesn't persist or go longer in that
06:31category. There's where I think now you're entering a whole new 12-month phase of this economic cycle of
06:39this dealing with the Federal Reserve. You know, and President Trump already talked about, you know,
06:45when they asked him, you know, do you want to fire policy? Why do I need to fire him? He's done very
06:50soon anyway. So the question is, do now, if this happens, does the shadow Fed start to become
06:56more of a story going out the next few months where that person says, hey, listen, when I'm,
07:01when I'm Fed president, we're cutting rates aggressively. Don't, you know, don't put all
07:04your eggs into Powell's basket. You know, help is on the way. It gets a little bit more complicated now
07:10because of the political economics that are going to this, because of the possibility of a shadow Fed,
07:16because we're not exactly 100% sure how this trade war is going to work out. So again, confusion,
07:24chaos, we're not sure, but any kind of direction to, well, if the labor market starts to really break,
07:31we'll be a little bit more dovish. That's, that's what you kind of want to hear. And if it doesn't
07:36happen, if the economy still moves forward, then this discussion is somewhat irrelevant. But
07:42even if there was no tariffs, they were still going to be very, you know, holding their ground,
07:51maybe neutral policy, you know, it's, we want to stay modestly restrictive, you know, there's still,
07:57there's still this hesitation to kind of get rate cuts going. Only two rate cuts were,
08:02were priced in for 2025. So we want to see how Powell talks about future economic weakness tied to
08:11the labor market. So let's talk about, you know, the unemployment rate, because from my perspective,
08:18you said, you know, January through April was one phase. Going forward, May, May forward is another,
08:25right? Because we do have these changes. It seems like on the on the freight side, if you look at those
08:30kind of the news from those people, if you look at like, what's happening in ports, it feels like we
08:35are about to have some major layoffs there, because we know that the last ships have have left China
08:42with, you know, untariffed goods. And now there's very few ships in like the busiest port and on the
08:48West Coast, all of that. So it seems like we're going to see layoffs from dock workers, truckers,
08:55anybody involved in that freight business. Do you think that that's enough to, to cue Powell that like,
09:02those kind of layoffs are going to are going to lower interest rates?
09:06To me, Jerome Powell is always going to work off jobless claims. And we always said one and a half
09:11to 2 million people lose their jobs each, each month. It really depends on the consumption data,
09:16as we can see in the last few months, the US consumption data held up, jobless claims held up,
09:24the unemployment rate has risen from 3.4% before four point, it's not, it's still at those levels.
09:30One thing to think about in the future, if the labor force isn't growing, the unemployment rate
09:36could stay lower than what people think in that context. So I think to me, jobless claims in the
09:43consumption data is really the key going out of the forward because the Fed has basically revolved
09:49itself on that portion of GDP and that labor trigger right there. So it is, are the dock workers enough
09:57to put us, no, that's not, but if consumption starts to fade and then the general economy
10:04starts to, you know, slow down in itself and you don't need those workers, there's where you start
10:11to get into a recession. Cause once a recession happens, listen, jobless claims break, there's
10:14nothing you can do about it. It's, this is how it's looked like, you know, uh, since the Pelopédia
10:19War, but here subsectors of the, uh, economy can create a higher unemployment rate. Like we always
10:27talked about before the trade war, Godzilla tariffs were in place. Um, we said, okay, so we're firing
10:34federal workers. We see that in the data, uh, state workers are still being hired, but that growth
10:41is already slowed down. Um, in this context, uh, going out of the future, if we're adding another
10:47variable, that's a negative, then it just raises the unemployment level pool. And if those people
10:53can't find jobs right away, there's how you get four and a half to 5% unemployment rates. You know,
10:59Fred president Williams has already raised his unemployment rate targets to four and a half to 5%
11:04already. You know, the fed kept that unemployment target very low, just in case if something bad
11:09happened. And, you know, they look at this as a negative for the economy going out. So if that's
11:15the case, the question, you could be in two camps, why not front load rate cuts to try to help this?
11:22Or by the way, listen, it's not our responsibility. This is, this is your guys's trade war. So we have
11:29to be careful of inflation, you know, so you're, you're in two camps, you're in two clear camps now.
11:34So what we want to see today in the fed is how do they deal when the data is
11:39breaking? Because it seems like if the data isn't breaking, they're not going to, they're just
11:43going to kind of stand pat and take it. But clearly the growth rate of inflation on the data lines have
11:50been slowing down. We have two handles on CPI, PC, you know, if the fed stuck to its original policy,
11:57the fed funds rate is three, three and a half percent easily, easily by now, not, no question.
12:02But they, they're being very mindful on what can happen with this trade war. And so we just want
12:10to see where's your trigger? When do you start to see so the bond market can get, and then the counter
12:17is Powell's going to stay hawkish. President Trump is, don't worry, we'll, help is on the way. And then
12:24it gets into this chaotic 12 month period, shadow fed president. What's policy in the future? You know,
12:31how does Powell deal with it? What if there's major dissents? We've talked about the civil war
12:34within fed presidents a few weeks ago. So you got a lot of variables that are just not normal
12:39in a normal cycle. And we have to look at it now going out 12 months because whatever happened the
12:45first four months is pre-trade war. Now it's, okay, we'll see where we take it from here.
12:53So, you know, you and I have talked about like soft data has been showing one thing,
12:57hard data has not shown it yet. Um, how long before some of those things shows up in the hard
13:04data? So like, let's, let's talk about dock workers specifically, say they start losing their jobs
13:09this week, um, or next week. How long does that take to get into the data where it would make a
13:14difference? Everyone is gearing up for summer for some of this data line to hit, right? So obviously
13:21the consumption data and everything was, was, was fine for the first four months, but it looks like
13:26everyone's kind of timelining the summer. If, if there are no deals and we just push forward with
13:33it, we should be seeing some of the weakness in the summer months, uh, out here. So it's there,
13:39there is a lag to this portion, but it's gotta, once you have consumption data weakened, that's,
13:46that's a whole different story. The consumption portion of GDP, the thing that the federal reserve
13:51has constantly told us they track has held up well for two years now. Um, but going out in future,
13:57is that going to be the case? If there's shortages and X costs now is two, three times, you know,
14:03are you going to pay, you know, there's all these things that are, we're starting that phase into May,
14:08but, uh, July and August to me are going to be a little bit more telling on what happens. Uh, if we get
14:16no deals, uh, if we get deals, then the marketplace might presume to show some leniency, uh, on to,
14:25you know, uh, uh, the future of a little bit more clarity on trade, but outside of that, uh, kind of
14:30gear yourself up for the summer to see if the data line gets weak. Cause right now some of the data
14:36lines beat body has went up. That's how it should act. Yeah. Um, so what does it mean that,
14:42that China is such a, you know, when you think about all the things that we consume,
14:46so many of them come from China. So it feels like even if we got other trade deals, if we don't have
14:51a trade deal with them, it feels like consumer costs go up. So consumption is going to go down.
14:56So it feels like that's the, really the key. We're putting tariffs on our three big trader
15:02partners. Um, China sells so much to us, you know, so the, the white house is game plan is it's going
15:12to impact them a lot more than us because we just consume, we'll consume other things, but China has
15:20five to 10 million jobs that are relying on this. So they're basically trying to wait them out.
15:26The Chinese are basically saying, listen, we've been doing this for thousands of years. We have
15:32the real long game here. So I think the, the initial response that I'm pretty sure this is
15:38Peter Navarro's thinking that China would fold because they've had a weaker economy. Their 10 year
15:44yield is has a one handle. They're stimulating their economy. So it is interesting to see if
15:50president Trump starts to take, well, China's doing all these things to stimulate their economy.
15:54Why isn't our federal reserve trying to do this? Well, that's one portion, but then you can say,
15:59well, the government is firing workers and withdrawing spending on certain things. So
16:06this is complicated, right? We're, we're doing this to ourselves. So we're throwing a lot of variables
16:11into an equation in a very short amount of time. So, uh, uh, we need to keep a mindful outlook on how is
16:18this all going to impact everything going out in the future? So this is why president Trump wants
16:24lower rates. Cause we talked about this back in November. What does president Trump want? He wants
16:28three things lower dollar check, lower oil prices check. It's not because we're drilling more
16:35Saudis assuming that president Trump made a deal with, with the Saudis on here. There's a OPEC supply is
16:41going out there. Oil prices are below 63. You're starting to get oil companies here saying we're
16:48not going to be producing as much oil because the price is so low. So you've already got that. So this
16:54is OPEC supply related, but check number two, now it's the 10 year yield and the fed funds rate.
17:02First he said, we just want the 10 year yield lower, but he really wants it. He wants rates to go lower
17:07because he saw what happened during COVID, right? He saw what happened during the mini trade war in
17:132018 and 19, uh, lower rates consumption gives the American consumer because we're a consumption
17:20based economy, a little bit more, uh, uh, flexibility during a trade war. So it it's going to get really,
17:27really chaotic over the next 12 months if there is no trade deal. So, uh, we have to see how the
17:31federal reserve responds to all pieces of data that starts to get these, uh, uh, the trade war
17:39impacts into them. So we've been talking about the fed, understandably they're like, I think in, uh,
17:44I've heard you say before, they're about 65% of, of where mortgage rates always are, um, is dependent
17:51on the fed. Let's talk about the bond market though. What does the bond market need to see? Where will it
17:56get ahead of the fed in this environment? So remember the slow dance, the 10 year
18:01yield and 30 year mortgage 65 to 75% of where the 10 year yield can range within an economic cycle,
18:07still fed policy. So, um, the spreads had gotten worse during the trade war. It's kind of a little
18:13bit better recently. Um, the bond market, if it, if it sees, you know, weakness, if it perceives to
18:22see weakness, again, it can drive yields lower, but a really good example is the last few days,
18:28uh, the ISM service, PMI data, labor day, they're all beat. So 10 year yield went up to 435, just
18:34right where I believe it should be trading. Um, now the question is, does the bond market
18:43say, Hey, listen, we're not sure if the feds are going to cut rates, even if the labor market breaks,
18:48see that's a new variable last few years, whenever the economy's weaker, tell the 10 year yield starts
18:54to go lower. We start to, you know, talk about recessions and everything. And then it reverses
19:00here. I think a little bit more clarity can give bond traders a little bit more.
19:04And this is why I, I do believe, I know a lot of people don't believe in the shadow fed present
19:08theory, but imagine if Powell is very, very hawkish and the economy is getting weaker. You think
19:15president Trump's going to sit back and just say, Oh, we're going to take this. China's doing the,
19:21all he's already talking about all these other countries are cutting rates and everything. And
19:25why are we, why are we at a disadvantage that will accelerate into a new phase? Um, the question is
19:33assuming it's Kevin Warsh, does Kevin Warsh start to go on the media tour and say, don't worry,
19:38everyone, America, Powell's not behind you. We're going to cut rates. We're going to help
19:42the American people. And you start to get into this whole, oh boy conflict, right? Where we'll pit,
19:52you know, um, Trump and American people versus a hawkish federal reserve that, you know, so that's
19:59why it's key to see if he admits, Hey, listen, if the labor data gets weaker, we'll act. Cause that's
20:06what he said before. He's always used that line. We have the ability to act if the labor market breaks,
20:11it's the labor market has broken it. So even though this is the whole paper, rock, scissors thing,
20:18this is a little bit different than that now because of the trade war and the inflation
20:24expectations have risen, even though the federal reserve believes this is a very short-term thing.
20:29It makes it much more complicated for Powell and them to justify being hawkish if the labor market breaks.
20:36Whoo. We have a lot going on, Logan. Thanks for being on. Thanks for explaining it all.
20:40As we head into this fed meeting day so that people can listen for themselves. Of course,
20:45um, housing wire will be reporting on it. I'm sure you'll be, uh, writing analysis on it,
20:49uh, to explain further, but thank you for, for all of this this morning. It's very helpful.
20:53Pleasure.
20:54Pleasure.