"All good. In the hood tonight" All Good in the Hood Tonight by Jamiroquai.

Powell's Outlook

"Pretty, pretty, pretty good" Larry David - Curb your Enthusiasm

On Wednesday, Fed Chair Jerome Powell spoke at a New York Times event and shared his thoughts on the current economic environment and likelihood of Fed rate cuts going forward.

"The U.S. economy is in very good shape and there's no reason for that not to continue...the downside risks appear to be less in the labor market, growth is definitely stronger than we thought, and inflation has come in a little higher."

And because the economy is in good shape, Powell shared this - "So the good news is that we can afford to be a little more cautious as we try to find neutral."

Powell also had to answer why the Fed cut rates by a higher than usual .50% back in September, while now being more measured with cuts going forward.

"What happened instead was in the couple of months after that, we got some data revisions, which strongly suggests that the economy is even stronger than we thought."

As fast as this story changed over the past few months, it can change again...especially if inflation ticks higher and/or the labor market weakens.

For now, the economy is looking pretty good, and the Fed will continue to gradually cut rates.

Realtor.com's Housing Outlook

On the heels of Powell's positive outlook on the economy, Realtor.com shared its forecast on housing - it too is pretty good.

Here's their take:

• Average mortgage rates of 6.3%, with rates edging down over the year to reach 6.2% by the end of the year.
• Home prices will grow by 3.7% continuing growth trends since 2012.
• Rents will remain about the same with a slight 0.1% drop.
• A 11.7% increase in existing home inventory continuing the trend from 2024.
• Single-family new home starts will grow an impressive 13.8%, reaching 1.1 million homes, a figure not seen since 2006.
• Home sales will grow 1.5% year over year to 4.07 million.
• Months' supply, a key market balance indicator, is expected to improve from a 3.7-month average in 2024 to 4.1 months in 2025. Anything under 4 is typically considered a seller's market, while 4 to 6 months of supply is typically considered a balanced market.

A key takeaway: Consumers looking to buy a home should not wait. Rates are expected to remain a bit elevated and home prices are poised to increase further.

Leading Labor Market Indicators - OK

Earlier in the week, the JOLTS report came out and it showed a surprise bump higher in help wanted signs as well as an increased Quit level. The Quit indicator is important to track because Quits have fallen to pre-pandemic levels. If they continue to decline, it highlights that people aren't quitting because they can't easily find a new job.

Also adding a modest positive tone was a larger than expected decline in Continued Claims or those who continue to accept unemployment benefits more than a week.

Jobs buy Homes and the Fed doesn't want to see any "further cooling in the labor market" so these readings were welcome.

Bottom line: Interest rates made great strides in attempting to stabilize from the steep selloff that started back in September. With the new Administration and fiscal policy not starting for nearly two months, expect continued volatility with potentially large interest rate swings.

Looking ahead

Next week begins the Fed's Blackout or "Quiet period", which means there will be no Fed comments or speeches to potentially move the markets. However, we will have an important reading on the Fed's inflation portion of their mandate - the Consumer Price Index. That reading is currently running at 3.3% annually, well above the Fed's liking. A hotter than expected reading could hurt rates. The opposite is true.

 
Mortgage Market Guide Candlestick Chart Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.5% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.

If you look at the right side of the chart, you can see how prices have jumped higher and are testing $100. Much like how Bitcoin is attempting to make $100,000 a floor. If Mortgage Bonds can close above $100 and make it a floor, current rates will go from being about as good as they could get to about as bad as they can get.