Powell sends mortgage rates higher as he questions December cut

"The biggest takeaway from the Federal Reserve's press event was that Powell did not fully endorse a rate cut in December. While the market still expects a cut, his response is typical of Powell, particularly when the 10-year yield is near its yearly low. He aims to manage market expectations, for reasons I still don't endorse, because the labor market is clearly getting softer. Powell could have had an easy layup today, but that's not his approach. As a result, markets are pricing in the December rate cut with less certainty, but for now, they still expect it."

"If the 10-year yield was at 4.50% and mortgage rates above 6.64% I don't think Powell would have disappointed people today, but with the 10-year yield recently under 4% and mortgage rates at yearly lows, he was going to take his shot to push the market back."

"Powell also made sure to let everyone know that the labor market isn't breaking, and he used his two favorite data lines to prove it. Both job openings and jobless claims data are still showing a labor market getting softer but not breaking. How can he make these claims with no government data on jobs? We do have private-sector labor reports and the states have data on their jobless claims and all it shows is a modest increase recently. I know this sounds crazy, given how low job growth has been, but Powell really puts a lot of weight on the labor force growth falling as the main reason for the slowdown."

Powell did not fully endorse a December rate cut, leaving markets less certain though still expecting one. He often responds cautiously when the 10-year yield is near its yearly low, aiming to manage expectations. Powell emphasized that the labor market is softening but not breaking, citing job openings and jobless claims. Private-sector labor reports and state jobless claims show only modest recent increases. Manufacturing and construction jobs have declined since late 2022, and housing permits are in recession. Powell attributes the slowdown mainly to falling labor force growth and sees insufficient labor pain to shift dovish now.

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