Federal Reserve Holds Steady on Interest Rates, Bond and Mortgage Rates Rise on Strong Jobs Report

California housing affordability dials back

The Federal Reserve left interest rates unchanged at their recent meeting and signaled that they will be closely monitoring the data for improving signs on inflation to begin lowering, but a better-than-expected employment figures for January drove 10-year Treasury prices down and bond and mortgage rates rising this week. The resilience of the macro economy may mean the anticipated rate cuts will be slower to manifest than many had hoped. However, weekly numbers on pending sales show that consumers were taking advantage of the recent reprieve on rates we enjoyed last month, and closed sales could begin to tick up as the spring homebuying season beings in earnest over the next few months.

Fed Holds Rates Steady but Warn They May Be Slow Coming Down: The Federal Reserve’s Open Market Committee (FOMC) met last week and decided to leave rates unchanged, which was anticipated in advance by the market. The FOMC signaled that they were done raising interest rates, but that future cuts would be driven by sustained improvements in inflation. As such, many analysts have pegged May as the earliest that we might see the first cuts with deeper reductions in the Fed Funds Rate not coming until the second half of 2024. Yet despite no surprises from the Fed, the meeting was quickly followed by a very strong jobs report that sent the 10-year back above 4% and the daily reading on mortgage rates back above 7% for the first time this year.

Homebuyers Jumped Back in as Rates Came Down: The average 30-year fixed rate mortgage hit 6.61% at the end of 2023 and the beginning of 2024 and recent signs show that homebuyers responded. Mortgage purchase applications have been on the uptick for 4 weeks in a row with the overall index reaching its highest level since September 2023. In addition, pending sales data for January shows a double-digit increase over early 2023 levels with gains being reported in almost every region of the state. The number of new listings has picked up in recent weeks, but the corresponding increase in closed and pending transactions has caused the total active inventory to remain flat. Days on market has likely peaked for the year, reaching a high of 36 days in January compared to a median of 42 days last January. The ongoing competitiveness of California’s residential market suggests that the recent reduction in rates has only deepened the supply imbalance by bringing more buyers to the market with only a minimal amount of new inventory.

Strong Jobs Numbers Drive Bearish Bond Market: Last week, the nonfarm employment numbers blew past consensus expectations, which called for 180,000 new jobs in January compared with the actual tally of 335,000. Many of these new jobs were created in the state and local government sector, though many private-sector jobs were created as well. The unemployment rate held steady at 3.7% last month, but the labor force actually shrunk last month for the third time in the past 4 months suggesting that some workers have begun to get discouraged and give up on their job searches. Still, the new data on job openings shows that there are still roughly nine million open positions being advertised and the strong jobs numbers continue to reflect a solid pace of hiring.

Labor Markets may Not Be as Tight as We Think: The latest jobs report from the Bureau of Labor Statistics was well above expectations, but upcoming releases could be weaker than these headline numbers suggest. Each state is currently undergoing their annual benchmarking processes, which will bring the typical monthly estimates in line with payments into statewide unemployment insurance systems last year. These figures suggest that we may see 2023 employment levels revised downward in California. This is supported by the fact that initial claims for unemployment insurance (UI) in California have been rising since September of last year while continuing UI claims reached their highest levels since early 2022 last week.

Consumers Still Source of Concern Despite Recent Strength: Although consumers remain unflappable due to strong labor markets and ongoing wage and productivity growth, they face mounting headwinds from rising debt levels, dwindling savings, and higher interest rates. Not only have revolving debt levels (i.e., credit cards) risen by roughly $300 billion dollars since the pandemic, but delinquency on those credit cards is up nearly 130% since 2021. In addition, savings rates dipped below 4% last quarter and the Fed’s report on money supply shows M2, which represents “cash, checking deposits, savings accounts, and other types of deposits that are readily convertible to cash such as CDs and money markets” – in other words, the money U.S. households have available to spend – has been shrinking for 13 months consecutively. This may begin to crimp spending in coming quarters if labor markets soften, which may ease inflationary pressure and help the Fed to justify more rate cuts.