The case for a December rate hike is coming together

By | December 1, 2017

For those who may have missed it, the market has been a roller coaster this week with each breaking news story causing drastic market movement. We began the week with the Senate confirmation hearing of Fed chair nominee Jerome Powell causing the stock market to react favorably as this news was coupled with reports that Trump’s tax reform bill will likely pass. We also saw an historic moment in the market yesterday when the Dow closed over 24,000 for the first time in history marking a new all-time high.

This morning brought the bombshell that former Trump national security advisor Michael Flynn has pleaded guilty to lying to the FBI in regard to his involvement in communication with Russia, an admission that caused the stock market to plummet. Now, as news regarding Trump’s tax reform bill gains momentum we have seen yet another swing in the stock market with it bouncing back as news outlets continue to report that Senate Republicans appear to have the support necessary to pass their tax plan.

While each successive news story will surely cause movement in the bond market and corresponding mortgage rates, it is worth revisiting Tuesday’s Powell Senate confirmation hearing to get an idea of what the markets will be doing not in the next few days, or even weeks but what is likely to occur over the next few months as Janet Yellen prepares to leave office and Powell in all likelihood assumes the role of Fed Chairman.


In his opening remarks Powell pointed to the goals of the Fed reminding us that the purpose of the Fed is to foster and ensure:

Maximum employment—meaning those who want to participate in the labor force are either currently employed or can find employment fairly quickly

Price stability— meaning inflation is low enough and stable enough so households and businesses do not have to take inflation into account when making household or business decisions

In these remarks, Powell assured he would do everything in his power to achieve these goals while maintaining the Fed’s policy of transparency and accountability. Additionally, Powell expressed support for the institutional structure and framework of the Fed, outlining his goal as chairman to support progress toward full economic recovery stating:

“Our aim is to sustain a strong jobs market with inflation moving gradually up toward our target. We expect interest rates to rise somewhat further and the size of our balance sheet to gradually shrink.”

Most of Powell’s testimony centered around topics in his statement above, including further questioning on the issues of inflation, national debt, interest rates, and regulatory reform.

In regard to inflation, Powell confirmed that one of his primary aims as Fed chair will be to sustain job growth while working toward inflation goals, noting that the economy is strong, unemployment is low, and there is good growth so it is time to begin the process of normalizing by focusing on reducing the Fed balance sheet and allowing interest rates to normalize from their artificial lows.

As Fed chair, Powell would like to ‘passively’ reduce the Fed balance sheet over the next 3-4 years from over $4 trillion to somewhere between $2.5 and $3 trillion. He would achieve this by giving money back to the treasury as bonds mature rather than lending that money out in the form of bonds as the Fed did through quantitative easing immediately following the crisis of 2008. Powell noted we have come a long way since the crisis of 2008 and the days of quantitative easing and when pushed on the subject of whether there would be another interest rate hike coming this December he noted:

“The case for raising interest rates at our next meeting is coming together.”

While this may not be good news to those of us in the mortgage industry it is important to note that while a low interest rate environment is generally helpful to many people, in the interest of long term fiscal sustainability it is important to allow interest rates to respond naturally, with the expectation that rates will continue to increase as the economy strengthens.

Also of interest to those of us in the mortgage and real estate industries are Powell’s comments on and commitment to housing and financial regulation reform.

Although void of much of the political theater that often accompanies Senate confirmation hearings, Senator Elizabeth Warren (D. Massachusetts) was the source of the most ardent dissent expressing concern that Powell’s desire to re-examine and possibly ‘roll-back’ certain Dodd-Frank legislation is the type of mindset that led to the financial crisis in 2008, with her line of questioning alluding to his background on Wall Street and in investment banking.*

* (See timeline to the left for more information on Powell’s background and qualifications)

In response to Warren’s questions Powell asserted that he believes we’ve written all the rules we need with current legislation being “tough-enough” or perhaps too stringent and warranting further examination to determine if the current regulatory burden is too much, something Warren likened to ignoring what happened on Wall Street, and weakening of essential regulation.

Throughout his testimony and despite criticism from Warren, Powell asserted that he is committed to prioritizing housing and regulatory reform noting that he believes it is a significant piece of unfinished business lingering from the 2008 crisis. Powell maintained that as Fed chair he will work to ensure that regulation is proportionate to the size and activity of the financial institution recognizing that small community banks did not contribute to the 2008 meltdown and should not be punished by the regulation enacted as a result.

When asked if he supports Dodd-Frank legislation Powell answered that he believes some things are working and others could be revisited. However when pressed on whether he believes there are currently any banks in the U.S that are ‘too big to fail’ he answered an unequivocal ‘No’. When questioned further, Powell explained that he believes that both regulatory policies and risk measurements should be ‘tailored’ to the financial institution with the largest and most complex financial institutions facing the most stringent policies and measures of risk as a way to ensure that necessary policy and regulation is in place without crippling small/local community financial institutions. He stated:

“We will continue to consider appropriate ways to ease regulatory burdens while preserving core reforms—strong levels of capital and liquidity, stress testing, and resolution planning—so that banks can provide the credit to families and businesses necessary to sustain a prosperous economy,”

And assured that:

“We must be clear and transparent about the principles that are driving our decisions and about the expectations we have for the institutions we regulate.”


For those of us in the mortgage industry this will be something to keep an eye on as it could mean the potential for decreased regulation (a.k.a compliance) costs associated with TRID thereby easing up some of the overhead and operation costs small lenders have been burdened with over the past few years. This will be some solace as we are likely to see mortgage rates go up, both over the next few weeks as the Fed’s December meeting approaches and the next few months as Janet Yellen prepares to leave office in February. In the meantime, over the next several days and into next week, keep an eye out for votes on net neutrality, more news surrounding Michael Flynn, and issues related to tax reform to drive markets and mortgage rates.

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