Hello and happy Wednesday,

It’s Fed day, and we’re here to bring you the latest insights into what’s happening in the financial world that could impact your real estate endeavors.

The Federal Reserve is expected to take a breather today, pausing its rate increases for the second time this year. This means that borrowing costs are likely to remain in the range of 5.25% to 5.5%. Jerome Powell, the Chair of the Fed, will follow up with a press conference half an hour later. Powell and his team want to assess the effects of previous rate hikes on the economy before making further moves in their rate-hiking campaign. Interestingly, this is the first time in a while that bonds are showing positive movement ahead of a Fed meeting, and equities are also on the rise. This could signal a reduction in market fear, but the real picture will emerge in about 2.5 hours.

We’ve found some enlightening pieces from Bloomberg and the Wall Street Journal that delve into external factors influencing the trajectory of interest rates.

What to Watch at Today’s Fed Meeting

At today’s Fed meeting, interest rates are expected to remain unchanged while officials debate the conditions required to raise borrowing costs later in the year. All eyes are on the “dot plot,” which will reveal the Fed’s quarterly interest-rate projections. The median projection is likely to indicate at least one more rate hike this year.

Wall Street’s Take on Rate Hikes

Major Wall Street banks are united in their belief that today’s meeting will result in a pause in the rate hike cycle, with future moves still uncertain. Rising inflationary concerns, partially fueled by the increase in oil prices, are contributing to this uncertainty, making the “dots” a focal point. Some FOMC members are even envisioning rate cuts in 2024, raising questions about whether these expectations will shift.

Today, fiscal policy is on many people’s minds alongside monetary policy. Rising deficits coupled with increasing rates draw attention to the growing expenditure on interest payments alone. Prominent figures like Bill Gross, Jeff Gundlach, and Ray Dalio have all been discussing fiscal dynamics. This topic gained traction at the Jackson Hole summit last month, with Barry Eichengreen presenting a paper on the subject.

Numerous pundits and commentators are exploring fiscal policy from various angles, introducing new perspectives compared to previous discussions about deficits and debt. In the past, rates often lowered as part of an implicit agreement between the Fed and fiscal authorities when deficit reduction measures were in place. It will be interesting to see if this dynamic re-emerges.

During the 2010s, slow employment growth and difficulty achieving the Fed’s inflation target were key challenges. Inflation consistently fell below 2%, coinciding with a period of relative fiscal restraint due to divided government. We must now consider whether fiscal policy plays a significant role in determining whether inflation returns to the Fed’s targets, but from the opposite side. Are abnormally large deficits keeping us in an era of inflation “misses” on the upside?

Lastly, oil prices are nearing $100 per barrel, posing a fresh challenge to central banks in their fight against inflation. Supply restrictions from Saudi Arabia and Russia, coupled with robust oil demand driven by unexpected economic strength, have driven prices upward. This could lead to higher fuel bills, accelerated inflation, and potentially, higher interest rates.

Stay safe, stay healthy, and let’s hope for a dovish tone in today’s FOMC announcement.

Best Regards,

Steve Ord

Real Estate Agent