Plenty of financial plans contain a sentence that begins “when rates come down.” This is a good week to reread that sentence.
The Federal Reserve is no longer arguing about how quickly to cut. It is arguing about whether to take back the cuts it already made.
From cuts to maybe hikes
At his first meeting as chairman in June, Kevin Warsh presided over a unanimous decision to leave rates unchanged. There was little appetite to move. But Nick Timiraos reported Monday that inflation worries among some of Warsh’s colleagues have sharpened since. They could push to entertain a rate increase when the Fed meets July 28 and 29.
What moved the traders is not subtle. Renewed U.S.-Iran hostilities pushed investors to ratchet their rate bets back up, Sam Goldfarb reported Tuesday. Inflation readings have run hotter since the war pushed energy prices higher.
The futures market — where traders bet real money on the Fed’s next move — now puts 42% odds on a rate rise this month, up from 18% at the start of July. Odds of two rises by year-end jumped to 56%, from 34% earlier in the month.
One caution cuts both ways: a bet built on a war can come undone if the fighting cools.
Read the 42% honestly
A 42% chance means a rate rise this month is still less likely than not. The single most likely outcome at the July meeting is that the Fed does nothing at all.
The professionals lean the same way. The Journal surveyed 72 economists between July 2 and 7. They expect the Fed to hold rates steady through December at the current range of 3.5% to 3.75%. Only 15% of them believed a rate increase was probable.
Mind the dates, though. That survey closed on July 7 — the day the White House says hostilities resumed — and before the futures market finished repricing. Both things are true at once. The pros said hold. The traders have since drifted toward hike.
Why is a hike on the table at all? Start with a miss. When the Fed cut rates last year, its leaders expected inflation to run just above their 2% target. Instead it has run between 3% and 4%. Subtract inflation from the 3.5% to 3.75% target and policy sits near zero, or even negative. On that reading, the Fed is stimulating the economy more than it ever meant to.
Fed governor Christopher Waller led the case for last year’s cuts because he worried the job market was faltering. Last week he said the risks had “completely flipped.”
Nobody there claims to have it figured out. “Most of the analytical tools that we have to try to analyze inflation start in the labor market. Yet the labor market is not causing the inflation,” Minneapolis Fed President Neel Kashkari said in June. “That makes it a particularly challenging moment for us.”
Your kitchen table
Here is the part that gets lost in the headlines. The Fed’s target rate is not your mortgage rate, and the two do not move one-for-one. Through all this repricing, the average 30-year fixed mortgage went from 6.57% to 6.60%. The 15-year went from 5.98% to 6.05%. Those are not the moves of a market that just learned something new.
So the honest takeaway is modest. If part of your plan rests on money getting cheaper from here, that is no longer the futures market’s base case. That deserves a conversation, not a scramble.
The Fed meets on the 28th. The June inflation report and Warsh’s testimony to Congress both land this week, before the decision. Nothing has to be decided before then — by them or by you.