Mortgage Rates Spike as Debt Costs Soar: Is the Fed Losing Control?
Mortgage Rates Spike as Debt Costs Soar: Is the Fed Losing Control?
This is Fed week, and it comes with high stakes as inflation, labor market data, and soaring government debt costs dominate the headlines. Here's what you need to know about the shifting economic landscape and what it means for the Federal Reserve's next moves.
Inflation is on the rise
Employment numbers are continuing to soften
Us debt is at record levels
Bonds are driving Mortgage Rates Up
Inflation: Back Above Target
The Fed’s 2% inflation target is slipping further away. This troubling trend has analysts warning of a potential 1970s-style rebound in inflation into 2025 and 2026, forcing the Fed to reassess its pivot strategy. Apollo reports that the probability of rate hikes in 2025 is now rising.
Core CPI remains stuck at 3.3%, while headline CPI has reversed its downward trend, rising to 2.7%.
Core Sticky CPI from the Atlanta Fed has leveled off near 4%, and all major measures of CPI stickiness now sit above 3%.
Compounding this is the Fed's preferred measure, Core PCE inflation, which is rising across all time frames:
Labor Market Cracks Widen
Signs of a softening labor market are becoming harder to ignore:
New job postings on Indeed have dropped 38% year-over-year, now at the lowest levels since August 2020.
Initial jobless claims spiked to 242,000 last week, the highest since October, while continuing claims climbed to 1.89 million, up 14% from pre-pandemic levels.
This aligns with weakening demand for workers, as job postings are now 5% below pre-pandemic levels, and BLS-reported job openings have fallen 34% since their February 2022 peak.
US Debt Costs Soar
The cost of servicing U.S. debt has reached record levels, adding pressure to an already fragile economic environment:
The average interest rate on Treasury debt rose to 3.4%, the highest since 2008.
Treasury Bill debt, totaling $6.4 trillion, now carries an average rate of 4.7%, while longer-term notes and bonds are rising as well.
Net interest costs hit an annualized $1.1 trillion in Q3 2024, a stark reminder of the challenges posed by higher rates.
Mortgage Rates Spike as Bonds Wobble
After briefly falling, mortgage rates are back toward 7%, reflecting turbulence in bond markets driven by negative economic data. The Fed’s rate decision on Wednesday will determine whether we see some relief or an acceleration toward even higher borrowing costs.
What to Expect from the Fed
Markets widely expect a 25-basis point rate cut this week, bringing the federal funds target to 4.25%-4.5%. However, Fed Chair Powell is likely to signal a slower pace of cuts, with a potential pause in January.
Bank of America suggests the Fed may adopt a wait-and-see approach in early 2025, reflecting concerns about sticky inflation and growing stagflation risks.
Some feel that the Fed needs to lower rates to be in a better position to service its debt
The Big Picture
With inflation back on the rise, labor market cracks widening, and government debt costs soaring, the Fed faces an increasingly complex task. Stagflation—rising unemployment alongside persistent inflation—looms as a growing risk for 2025.
Key Events This Week
S&P Global Services PMI Data – Monday
November Retail Sales Data – Tuesday
Fed Interest Rate Decision – Wednesday
Q3 2024 GDP Data – Thursday
November Existing Home Sales Data – Thursday
November PCE Inflation Data – Friday
Will Powell’s cautious tone this week restore market confidence, or will the Fed’s nightmare scenario take center stage? Stay tuned—are you ready for Fed week?