August 12, 2025
This week the markets are still digesting the plethora of economic events which occurred during the last week of July and August first. However, there is no time to catch our breath as a new month of data starts this week with readings on inflation. We have had some good inflation readings during the first part of the year, but we also have had warnings about the effects of tariffs that we have not yet felt. Indeed, last month’s release was the first indication that inflation could be heating up. Hopefully that is not the start of a trend.
Speaking of inflation, it is the Federal Reserve’s mission to balance the promotion of economic growth against the threat of inflation. This is a job which is not easy. This body has always been completely independent from Congress and the Executive Branch and for good reason. You might say – economics over politics. There has been not so subtle indications that Fed Chair Powell might be subject to dismissal. But does it matter? When the rumors first surfaced the markets reacted severely. But like the tariffs, as time went on there has been less of a reaction to such threats.
One thing we continue to remind our readers. The Fed lowering short-term rates does not always equate to a corresponding reduction in long-term rates such as mortgages. When the Fed lowered rates during the second half of last year, mortgage rates did not fall. Why? Because there was no evidence that the fight against inflation was finished. Which brings us back to this week’s report. We need to continue to see progress on the inflation front for the Fed to be comfortable lowering rates again AND for long-term rates to respond in the same manner. The recent weak jobs data almost guarantees the Fed is likely to lower rates at their next meeting – IF inflation is not being rekindled.
Source: Origination Pro
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