Key facts
- Fed Chair Kevin Warsh indicated the start of a rate-hiking cycle.
- Factors driving higher rates include an improved labor market, corporate bond competition, and the Middle East conflict.
- The Fed aims to reach 2% inflation without causing a recession.
- Mortgage rates have risen above 7%, impacting sales application data.
- President Trump's continued use of tariffs is a concern for the Fed and markets.
- Q3 GDP is running at 5.1%, and retail sales beat estimates.
Federal Reserve Chair Kevin Warsh signaled the commencement of a rate-hiking cycle, attributing the move to an improving economy, particularly the labor market, increased competition for bonds from AI companies, and the ongoing conflict in the Middle East. Warsh emphasized the Fed's objective of guiding inflation towards its 2% target without triggering a recession, a goal that has remained elusive for five years.
The commentary comes as mortgage rates have surpassed 7%, a level that has negatively impacted housing market sales, as indicated by purchase application data. The author notes that higher energy prices, exacerbated by the Middle East conflict, have been a significant headwind for mortgage rates. Additionally, President Trump's persistent use of tariffs is identified as another factor that the Fed and markets view unfavorably, complicating efforts to manage inflation.
Despite these challenges, the economy has shown resilience, with retail sales exceeding estimates and Q3 GDP growth reported at 5.1%. Warsh highlighted the stabilization of labor data, using the 4-week moving average of jobless claims as a key indicator, which remains far from recessionary levels. The author suggests that managing the trade war and the Middle East conflict are within the administration's control and could help alleviate pressure on mortgage rates.