Unprecedented Rate Volatility as Markets Ponder Next Big Move

It’s a tremendously important and volatile time for the market and especially for interest rates.  The biggest inflation surge in decades pushed rates to their highest levels in 14 years by mid June.  Since then, there are signs that things have leveled off, but no compelling evidence for a reversal. The Federal Reserve (or just “the Fed” for short) is at the center of this high stakes game.  The Fed is closely watching inflation and job growth to determine how quickly it needs to adjust its main policy tool the Fed Funds Rate (FFR).  The FFR is very different from mortgage rates or 10yr Treasury yields (which correlate well with mortgage rates), but the expectations for future FFR changes are very important.  They set the tone for rate movement across the board. The chart above shows 10yr yields peaking along with Fed rate hike expectations in June.  After that, rates recovered as investors responded to falling energy prices and weaker economic data. Things changed in August.  Longer-run rate hike expectations surged after a very strong jobs report.  Upward momentum continued as other reports added to a more upbeat economic outlook. Stronger economic data coincides with higher rates in general, but it’s doubly important right now while the Fed is considering whether it might be time to slow the pace of rate hikes from the recent pace of 0.75%.  Moreover, the Fed has specifically pointed out that the jobs market is “too hot,” thus making labor market data even more important for market movement.
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