Federal Open Market Committee (FOMC) members are becoming more hawkish about controlling inflation and could be set to implement the central bank's largest one-month increase to the federal funds rate since the early 1980s. Federal Reserve Governor Christopher Waller says he is definitely considering going beyond another 75 basis point rate hike should the data show the need. 

The Fed's hand is being all but forced by the current economic situation. Economists were hit with a gut punch when the latest government data showed inflation rising at its fastest pace since 1981. The Bureau of Labor Statistics reported June's Consumer Price Index (CPI) rose by 9.1% year-over-year. That was above the 8.8% expected by economists. The core CPI, which excludes volatile readings like energy and food, rose by 5.9%, just above the 5.7% estimate. Furthermore, when adjusting for inflation, hourly wages fell by 3.6% on an annual basis.

The producer price index (PPI) nearly hit a record in June with 11.3% growth year-over-year. The Bureau of Labor Statistics' measurement of prices received for final demand products showed that 90% of the gain came from the cost for oil, natural gas and other energy-related products.

Another compounding issue is the lingering yield curve inversion. The 10- and 2- year Treasury note yields inverted in the first full week of July. A week later, after the release of the CPI data, the spread between the two yields hit its widest point since 2000. That spread narrowed slightly as investors started becoming less bullish about a 100 basis point rate hike from the Fed and pricing in the potential for a 75 basis point hike. Investors and economists are also grappling with the release of bank earnings with major institutions like JPMorgan Chase and Morgan Stanley citing losses. 

ROCKY PATH TO NORMALIZATION

The volatility of the current economic situation continues to force constant change in mortgage rates. Freddie Mac's 30-year fixed-rate mortgage average came in at 5.51% the week of July 11—20 basis points higher than the week prior. Freddie Mac economists cite the "fiscal and monetary drags" as major contributors to the volatility, adding, "With rates the highest in over a decade, home prices at escalated levels, and inflation continuing to impact consumers, affordability remains the main obstacle to homeownership for many Americans."

New data from Black Knight shows how quickly the housing industry is falling from the extremely high volume it experienced in 2020 and 2021. Black Knight's latest Originations Market Monitor report shows that rate locks across the board were down 11% month-over-month in June with a 13% drop in cash-out refinances. But just looking at the lock volume compared to 2021 tells a much bleaker story than what might be a more apples to apples comparison. 

Black Knight's report goes on to say that, "Excluding the impact of home price appreciation, June purchase locks were down nearly 21% year-over-year, but remain 3% above the pre-pandemic levels." Essentially, the housing market is moving back to what would be considered a normal year after being at an extreme high for nearly two years during the pandemic-era monetary policy.