On this episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about the current economic uncertainty and what path the Fed will take this week to address that.
Related to this episode:
Showdown: The White House vs the Fed on mortgage rates | HousingWire
https://www.housingwire.com/articles/the-white-house-vs-fed-on-mortgage-rates/
Enjoy the episode!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.
Related to this episode:
Showdown: The White House vs the Fed on mortgage rates | HousingWire
https://www.housingwire.com/articles/the-white-house-vs-fed-on-mortgage-rates/
Enjoy the episode!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.
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NewsTranscript
00:00Welcome, everyone. My guest today is lead analyst Logan Motoshami to talk about the
00:10current economic uncertainty and what path the Fed will take this week to address that.
00:15First, I want to thank our sponsor Optimal Blue for making this episode possible. Logan,
00:21welcome back to the podcast. And for those of you who are watching, we know that we do
00:27have a good number of people who watch this as opposed to just listening. Your hair is crazy.
00:32And tell me why you showed up with your hair like that. We're talking about what will the Fed do
00:38next. And, you know, this is Friday morning. We just got the Michigan Consumer Sediment Index.
00:44If I took it at face value, that was the worst report I've ever seen in history.
00:48So in a chaotic time like my hair right now, right? What does the Fed do? Because in chaos,
00:59some people love to be more focused, but some people are prone to doing mistakes.
01:07So when I am in a chaotic situation, I tend to do better work because I don't let things,
01:14you know, change my model too much. But the Federal Reserve is probably more at risk of
01:21maybe doing a policy mistake if they take all the survey data or all the interpretations of
01:27what the marketplace is saying to us. So the Michigan Consumer Sediment Index
01:33had a vertical move up higher in inflation expectations. Now, in theory, the Fed would
01:39have to actually raise rates right now to offset that. You want to anchor inflation expectations.
01:46However, you know, the employment data had a waterfall collapse as well, like, you know,
01:52what people think. So that on the dual mandate side, what do you pick, right? It's basically,
02:01you know, you're doing an AKA dual mandate shootout now. Who do you choose? Do you choose
02:10the gun for employment or choose the gun for inflation? So it's going to be very interesting.
02:18I encourage everyone to make sure to kind of listen to what the Fed talks about, or we'll go
02:22over it. But how they act this year will be very relevant for not only this year, but next year in
02:30terms of, do they make a policy mistake by reading too much into one of these data lines?
02:36Because on one hand, you should be cutting rates. On the other hand, you should be raising rates.
02:41The Fed has been a little bit more stable in terms of not reacting to one data point or one
02:47inflation report or anything like that. But there's so much noise now, and they raised their
02:53inflation expectations in 2025. That's one of the reasons I believe the 10-year yield even went up
02:59earlier. So it's chaos, right? This is concentrated economic chaos. And
03:08in this environment, you're more prone to make a policy mistake because you might react to
03:14something a little bit too aggressively to the up or down side. So, you know, in the midst of this,
03:19we also have an administration that really is focused on housing and specifically
03:24on the case for lower mortgage rates. They want to make housing more affordable. That's something,
03:29you know, they don't have direct control over interest rates, over mortgage rates, but they've
03:34made it clear. We have a new FHFA director, Bill Pulte was confirmed. And his first evening on
03:41Twitter after being confirmed, he made sure to say, you know, rates are falling or that he's
03:46very focused on, you know, GSE exit, but also rates. And then he said, you know, rates have
03:50fallen for the last, was it six weeks, Logan, that he said? President Trump. Right. So I know
03:57that they're eager to like, so how does that work into this? I know that the Fed is supposed to be
04:02independent. I believe they've, they've tried to stay out of the fray, but when you're talking
04:05about inflation, aren't you also talking about mortgage rates? Here's the thing. We had lower
04:12mortgage rates when the growth rate of inflation was higher. So policy, Fed policy is really 65
04:19to 75%. And the reason I'm harping on this is that I didn't do a good enough job in the past
04:24of kind of making that the vocal, you know, where the Fed, the Fed can control things. And if the
04:32Fed wanted to lower mortgage rates, it can't. A lot of people say they can, they can easily do it,
04:37but the Fed right now, their Fed funds rate is obviously above the growth rate of inflation of
04:43PCE, right? We had the inflation reports. We're still going to have a two handle on all the PCE
04:49inflation. So they believe they are still restrictive in that context. You know, they
04:55could just stay put until they see the labor market break. Some people say, well, the growth
05:01rate of inflation has to take off in the 21st century. We have never had PCE inflation above
05:08three and a half percent outside of global pandemic. And that was a very short inflationary
05:13spike and a disinflation spike. We've never been able to pull it off. We've had zero interest rate
05:17policy, QE1, QE2, QE3, Operation Twist, deficit spending, never could get it, never could get
05:22inflation up there. So the question I think the Fed must be asking themselves, can a global trade
05:30war create inflation to bring PCE inflation to growth rate on a 12 month basis above three and
05:36a half percent, which gives them a little bit less restrictive policy and can they just stay there?
05:43I think that's the complicated question for themselves. I think half of the Fed is very
05:48mindful of tariffs and half of the Fed doesn't care. So there's going to be an interesting
05:53divergence between some of the presidents. And that matters a lot for housing in that regard.
06:01So you can create a lot of chaos, stocks selling off, bonds going down. There's a lot of Wall
06:07Street economists have already lowered growth, but that was the whole game plan. We want to
06:14lower aggregate demand and create higher labor supply. I think JP Morgan, I think it was JP
06:20Morgan, came out and said, well, we're raising the unemployment rate to 4.4%. We lowered our
06:25job growth down to just above 100,000 per month. And we basically say the unemployment rate will
06:33get to 4.4%. Under that model, the 10-year yield has room to go down if that occurs. Because once
06:41you get above 4.3%, then the Fed say, unless they change this, right? And I think that's the thing.
06:47Do they change it to say, we're going to be a little bit more mindful of inflation because
06:52inflation expectations are taking off, but it just gets more in chaos, you're prone to make mistakes.
07:01So it'll be interesting to me to see how the Fed reacts to everything, right? Everything we have
07:07just seen in the last six weeks, a lot has changed since the last time they had their meeting.
07:14So you've said here on this podcast, you've said on your socials and our Slack, and to me,
07:21you've said, yeah, the 10-year yield looks about right to me for what's going on. I don't know
07:25that, I mean, I think the expectation that mortgage rates would go down more with some of
07:31these things happening is what people thought. So maybe explain why you think it looks about right.
07:37So if you look at the labor data, remember, I'm a paper, rock, scissors labor over inflation.
07:44If we didn't have the trade war tap dance or all this craziness, we would be saying the labor data
07:52job growth firmed, it's in my forecast range. The job openings data firmed up a little bit,
08:00and the jobless claims data came down. So if I just took the labor data, the 10-year yield looks
08:05about right, nothing abnormal. The growth scare of what the trade war tap dance did and the selling
08:14of stocks brought the 10-year yield lower. And we're already seeing people revise estimates,
08:19and we've seen the White House even talk about there could be a hit early on. So the 10-year
08:24yield is where Fed policy at, looks about right. We got to a key technical level, we bounced off
08:30of it. And we have these waves and channels every single year since 2022. This is why when I
08:35forecast, I do channels with a 10-year yield based on Fed policy and where the economy is.
08:41I don't mortgage rate target. Sarah, if I ever do one of those things-
08:45I know what you're going to say.
08:46Just take a gun and shoot me and just end my life. I never understand that concept because-
08:52Wait, wait, usually you tell me to take a knife and knife you in the thigh and
08:58throw you to hyenas or something. Oh, no, no, no, no. My ultimate talk
09:01is shoot me in the thigh and let me die by having a pack of hyenas eat me alive slowly and intimately.
09:08Yeah, so basically that. As somebody who just talks about the slow dance and everything,
09:15and I just do 10-year channels and rates and they move with each other. And this has been
09:19happening since 1971. There's so much emphasis on mortgage-backed securities, but the spreads are
09:25one to one and a quarter difference. It's really Fed policy. That's why I encourage everyone,
09:29go look at the chart of the 10-year yield and 30-year mortgage rates since 1971.
09:34And it's a lovely slow dance. Sometimes they're close, right? The spreads are good. It's a very
09:39intimate slow dance. Sometimes the slow dance is very bad, like junior high or footloose,
09:46something like that. But yeah, so it looks about right considering what's happening.
09:53Now, if the jobs report, let's say jobs Friday came in at 54,000, wage growth slowed down,
10:00hours worked went even lower. Job openings data is 6.2 million instead of near 8 million.
10:07Hires and quits and everything fell down. And then the jobless claims is that 278,000
10:12didn't come back down to the 220 area. Boom, 10-year yield. Bam, we are cracking through that
10:19418 level easily, but that didn't happen. So for now, everything looks like it's now going
10:24in the rest of this year because we try to format this on the unemployment rate.
10:29If government job workers slow and go negative, that means the total employment level goes lower.
10:35If the labor force stays constant or grows, the unemployment rate could go up.
10:39And the policy mistake that I think the Fed could make is saying that, well, if the unemployment
10:44rate goes to 4.3% or higher now, we don't care because we're focused on inflation from tariffs.
10:51Okay. That is something that they can say in the next meeting. That's why I'm very, very mindful
10:58of this. And again, in chaos, this stuff like this happens until you get a little bit more clarity.
11:04Okay. So from your perspective, if that is something they do and that's a mistake,
11:09then what's the outcome there? The outcome is what the Fed wrote about
11:13in 2018. If they chase a tariff trade war by raising rates, it's most likely they'll
11:18send the economy into a recession. And then what that happens is that you're going to get everyone,
11:26hey, the Fed raised rates, a recession, bond yields have to go down and rates have to go down.
11:31So that's why I don't believe in a 1970s stagflation where you need a supply shock.
11:39We did a podcast on that and we try to model out what has to happen to get that. But
11:43in the short term, you're more prone to an accident. So I know that we talked about 1970s
11:48style inflation, why that's not the case, but that was like a year ago. Let's revisit a little
11:53bit of that now, because I hear the term stagflation all the time now in a way that I
11:58didn't even a year ago. So maybe explain to the youngsters out there what stagflation is,
12:04if they didn't live through it the first time and why you don't think we're there now.
12:07Well, the best way for me to explain stagflation to everybody listening because most labor here is
12:13real estate and mortgage, the US housing market right now, prices are rising, but sales are at
12:20the lowest levels ever. So if you think about stagflation is inflation stays higher than what
12:26you want, but growth slows down. So we have that in housing. The growth rate of pricing has slowed
12:33down a lot, so that's a positive. But in a stagflation, inflation takes off, growth slows
12:42down, you get a recession and you don't have the benefits of the 10-year yield falling. Because
12:50back in the mid-70s, early 80s, inflation and rates took up even in a recessionary period,
12:57that's stagflation in that regard. So a lot of people are saying because of tariffs,
13:02inflation will be more sticky, but then because of tariffs, growth will slow down and be negative,
13:07and that's stagflation. It won't look like the 1970s where you had double-digit inflation rise
13:13up in three different stages. You really need a supply shock, and then that supply shock forces
13:20wages to go up and inflation goes up. But we had unbelievable labor force growth. Housing was
13:24booming, by the way, in the mid to late 70s. So it's a completely different backdrop, but you
13:30could get a shorter version if some people are talking about stagflation in that regard that
13:34the trade war tap dance, it leads to lower economic growth, it keeps inflation higher
13:38than what the Fed wants. It won't look like the 70s, but in that short duration form,
13:43you could think about stagflation in that way. So I think back to a year ago, or maybe even
13:49longer than that, but not that long ago, we were talking about soft landing for the economy.
13:53And now we never talk about that. What we're talking about is like, are we going into a
13:58recession? What's the difference there? And what is the Fed thinking about that specific thing,
14:05about recession? First of all, I don't even discuss the soft or hard landing anymore. That
14:11was a 2024, 2023 story. We have to go back into a normal economic cycle period now. And of course,
14:17the variables have changed. So it's very simple. If the US goes into a recession,
14:25it goes into a recession. Forget soft or hard landing. This trade war tap dance started in 2025.
14:32So this is what we're dealing with. This is what the Fed has to deal with. This is by choice.
14:36This is not by anything forced into this. So we have to look at the economic cycle in
14:40a much different way and we have to adjust to it. This is why we did that podcast on November 7th,
14:452024, what can or can't happen. Mortgage rates can't really go to 8% in this environment because
14:52the builders will start to go into recession even deeper. If you want to trade war tap dance,
14:57you're going to have markets act crazy again. That's what's happening. We technically had a
15:01correction. So yeah, the soft hard landing, I kind of threw away. We're just going to look
15:06with the cycle. And I think that's where we have to keep an eye on data. This is why we framework
15:12the job market on you can get higher unemployment rate, lower job growth. Does that break the labor
15:21market or does that force rates to go low enough to maybe boost the housing market? Which clearly
15:27now we know the White House is 100% on getting that because they think they can market that
15:32as a victory. Again, oil prices falling, mortgage rates falling. Those two things,
15:37I believe in their surveys, were number one and two. And then they push that and they go with
15:42that. And we've seen it again. I think I've seen Trump market it three times. Pulte, the head of
15:47the FHFA talked about it as well. So you can see this is the game plan here. So if you're out there,
15:53you're running a business, how do you make your decisions not knowing what's going on here?
16:00If the Fed is dealing with this chaos, it's very hard for business people to deal with this as
16:05well. So we're seeing this in a lot of other indexes where business people are calling in
16:10the White House, hey, what are the rules here? I don't know. And this is one of the reasons why we
16:15did that podcast on November 7th. What happened back then in 2018-19 is business investment went
16:21to zero because people didn't know the rules. So right now we're starting to see people,
16:27what are we going to do? So clarity from chaos can clear that up quickly.
16:35So that's why I'm hoping that in April, something gets cleared up because doing this for like four
16:42years, I mean, people are going to get sick of it. Back and forth, tariffs on, tariffs off.
16:47So something has to change. You either do a deal like you did in 2019 or you go full-blown tariffs
16:55and just take the consequences. So I think if you're asking me how are business, every business
17:02person is up in the air right now. And again, this is why it's somewhat frustrating because
17:09the president has talked about regulations and doing all these things for businesses,
17:13and then he does this. And this is just how he's always, he's always been a tariff person.
17:18So in that context, you get maybe a clear advantage here, but then this... So that's
17:23why I'm hoping by April, something gets some clarity on it. And this is why I've talked about
17:31recently. If you go in the trade war tap dance early, you have to pull the trigger because
17:36everyone's just going to think you're not going to do something. And you always see these updates.
17:40So by April, we should get something. And then they got to just go with it. They can't like
17:47five months from now, go back into it again. And just people need to have a little bit of
17:52more clarity to push forward, to make choices out there. And then we go with that.
17:58So you're talking about April because April 2nd is the implementation date of a lot of these tariffs.
18:03So we will know for sure, are they going on or are they going to get
18:07potentially pushed back? But it feels like that is a hard date,
18:11hard deadline in a way that we haven't seen so much before this.
18:15Yeah. And that's more of the reciprocal tariffs. And I mean, the US is such a
18:21unique economic superpower. And a lot of these other countries are just very small compared to
18:26us. And they make us like how their economy run is selling into us. So it'll be interesting to
18:34see what the final outcome of that in April. So last time in the 18-19 period, how did it
18:42end up with tariffs? What was his trajectory there? What did he do? How did it end?
18:47So the economic data started to get worse and eventually Trump made some deals. And then when
18:55the deal talk was starting to get firmed up, the economic data started to get better. I know this
19:02because I wrote about this all the time that I think people mistook not reading the positive
19:09data lines for the second half of 2019 housing data picked up. And then the early part of 2020,
19:15the first two months before COVID hit, jobs beat estimates, retail sales were up,
19:20ISM service sector was up, PMI manufacturing, housing permits were up. That is expansionary
19:25in every single cycle post-World War II. I wrote the article. I still have all those charts up there
19:30and everything. I remember that. So there was clarity and that clarity brought things back
19:37in line. So we'll see. We'll see if this is just kind of January to April trade war tap dance and
19:43then they go with it. But again, for me, for me is I really want to see how the Fed and with the
19:50dot plots and everything and how they all look at this. And of course, Bowman, who got a promotion,
19:57she's now, you know, OK, I know we're focusing on inflation, but I'm going to focus on the labor
20:02market and the economy. So interesting time, Sarah. Interesting times. Interesting times,
20:08which, you know, keeps you busy, keeps me busy. So we'll take it. But I do feel for people
20:14of all different kinds trying to make decisions in that sort of lack of clarity. So hopefully we
20:19get some more, at least from the Fed next week. Yes. Yes. And again, the Q&As are going to be
20:25really key because you're going to get oh, you're going to get some interesting questions going out.
20:30And I wonder if some reporter is going to ask them. It seems like the White House is very keen
20:36on getting mortgage rates lower for the American people. Do you feel that you as Federal Reserve
20:41presidents are out of touch with society, that just getting mortgage rates down to six percent,
20:48you know, the White House wants that, the American public want it. But you guys are
20:52still in the Neil Kashkari phase. You can't balance the economy. Six percent mortgage rate.
20:56So it'll be interesting if there's a housing component in out here. And we kind of picked
21:02up on this early. Like, oh, you're talking caps. Oh, my God. They want lower mortgage rates. You
21:06know, nobody. But now they're like, lower mortgage rates, lower mortgage rates. And
21:09Pulte come out yesterday and did the same thing. So. And I would, listeners, if you want more
21:15information on that, Logan wrote up an article about the Fed versus the White House on mortgage
21:19rates. Go look that up. It's great. He goes into detail. There are charts. Let's just say there
21:24are always charts, man, which are hard to do on a podcast. So, Logan, thanks for joining us. And
21:32we will talk to you again soon. Pleasure, Sarah.