Dashed Rate Cut Hopes, Airline Losses, and Mortgage Rates
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Fed Rate Cut Hopes Fade…
Federal Reserve officials are continuing to dash investors’ hopes of an interest rate cut anytime soon.
This week, several central bank members have made remarks that suggest the war against inflation isn’t over yet. Inflation readings for March — including the much-watched Consumer Price Index (CPI) — came in hotter than expected.
That included Fed Chair Jerome Powell, who said that, although inflation growth has eased since the Fed began hiking interest rates in 2022, the Fed isn’t convinced yet that the rate is headed back toward its 2% target.
“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Powell said.
He pointed to the Personal Consumption Expenditures (PCE) index — the Fed’s favorite inflation metric — which showed little change in March.
According to Powell, the Fed should therefore keep interest rates higher for longer.
“If higher inflation does persist, we can maintain the current level of restriction for as long as needed,” he said.
On Wednesday, Cleveland Fed President Loretta Mester said that, while it’s still possible that the Fed’s monetary policymaking wing, the Federal Open Market Committee (FOMC) will still cut rates three times by the end of the year, it will be a “close call.”
“At some point, as we get more confidence, we will start to normalize policy back to a less restrictive stance, but we don’t have to do that in a hurry,” Mester noted. Whether or not the Fed cuts rates will depend on data releases, she added.
Meanwhile, Fed Governor Michelle Bowman said Wednesday that it’s possible the Fed’s efforts to quell inflation have stalled out. Earlier this month, Bowman warned of the potential for another rate hike, even.
“[There] is a lot of financial market activity and a lot of continued growth that we wouldn’t have expected if policy was sufficiently tight,” Bowman said this week. “I think time will tell whether it is sufficiently restrictive.”
New York Fed Head John Williams also chimed in on the FOMC’s next moves yesterday. “I don’t feel an urgency to cut interest rates,” he said. He called the current fed funds rate — between 5.25% and 5.5% — “a good place.”
“I think we’ve got interest rates in a place that is moving us gradually to our goals,” Williams said.
“I think the monetary policy is doing exactly what we like to see over time. The data will inform our decisions.”
Meanwhile, yesterday, Atlanta Fed President Raphael Bostic also indicated that he doesn’t expect a rate cut until the end of the year. Because the labor market has been strong, Bostic added that he can afford to be patient.
“I’m not in a mad-dash hurry to get there if all these other good things are happening,” Bostic said. “Right now, our stance is restrictive. It will slow the economy down and eventually get us to 2%.” (2% is the Federal Reserve’s inflation rate target.)
United Reports $200M Loss Thanks to Boeing
On Tuesday, United Airlines (NSDQ: UAL) reported that Boeing’s (NYSE: BA) quality control issues pushed it into the red during the first quarter.
According to the airline, the grounding of Boeing 737 Max 9 jets following the now infamous Alaska Airlines (NYSE: ALK) door plug disaster cost it $200 million in losses.
Were it not for the grounding and subsequent inspections mandated by the U.S. Federal Aviation Administration (FAA), United would have turned a profit during the quarter, the company said.
The incident — in which a panel fell off a Boeing 737 Max 9 plane while in flight — led the FAA to ground this model for three weeks. United’s fleet of 86 Max 9 jets made up 80% of its mainline plane inventory — a larger percentage than any other airline.
However, lately, United has had multiple safety mishaps involving Boeing jets in recent months. That triggered a separate investigation by the FAA into the airline’s safety measures.
Anyway, United expects to receive just 61 single-aisle Boeing jets in 2024 — about 40% fewer than it planned to receive at the beginning of the year. The airline is also no longer expecting to receive any deliveries of Boeing 737 Max 10 jets this year. The FAA has yet to bestow its blessing upon this next-generation Boeing model.
United also announced yesterday that it plans to lease 35 Airbus (OTC: EADSY) A321neo planes. This model is a direct competitor to Boeing’s 737 Max jets. United expects to receive the new Airbus planes in 2026 and 2027.
For the quarter, United reported revenue of $12.5 million, a 10% year-over-year gain. The airline also reported an adjusted loss of $50 million — better than the $207 million loss reported for the year-ago quarter.
That came thanks largely to an increase in capacity despite the 737 Max 9 issues. According to United, the number of miles flown by passengers in the first quarter increased by 9%.
Rising Mortgage Rates Lead to Drop in Home Sales
March sales of previously owned homes fell 4.3% to a seasonally adjusted annualized rate of 4.19 million units. That’s according to the National Association of Realtors (NAR), which reported that sales fell 3.7% on a year-over-year basis.
The culprit?
Rising mortgage rates.
When counting sales, the NAR uses the number of closings. March closings are typically from contracts that took effect in January and February. Although mortgage rates fell in the mid-6% range in January, they jumped closer to 7% in February.
“Though rebounding from cyclical lows, home sales are stuck because interest rates have not made any major moves,” NAR Chief Economist Lawrence Yun said in a statement. “There are nearly 6 million more jobs now compared to pre-COVID highs, which suggests more aspiring home buyers exist in the market.”
Meanwhile, the inventory of previously owned homes rose in March by 4.7%. On a year-over-year basis, inventory jumped by 14.4%.
Typically, greater supply to meet demand has a cooling effect on home prices.
That wasn’t the case in March. The median price for an existing home sold last month was $393,500 — a 4.8% increase on a year-over-year basis.
According to the NAR, that’s also the highest median price ever for the month of March.
First-time homebuyers accounted for 32% of sales, a boost from 26% in February and 28% in March 2023.
However, it will be interesting to see how would-be homebuyers react to current mortgage rates.
This week, the popular 30-year fixed-rate mortgage had an average rate of 7.10% versus last week’s 6.88%, according to lender Freddie Mac. Back in March 2023, the average for a 30-year fixed-rate mortgage was 6.39%.
“As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year,” Freddie Mac Chief Economist Sam Khater said.
Mortgage rates generally track the benchmark 10-year U.S. Treasury yield, which is currently at its highest level since November. Bond yields are up due to anticipation that the Federal Reserve’s benchmark interest rate will remain elevated for much of 2024 — if not until 2025.
If inflation continues to grow, it could cause mortgage rates to go even higher. Which would likely lead to falling sales.
“Homebuying is such a major decision that people have the calculator in front of them,” Yun said on a call with reporters yesterday. “So if it’s 7.01%, then it’ll be an emotional shock. But nonetheless, I think they’re going to plant a number into the calculator and see whether their monthly payment is manageable or not.”
Are We Headed for “No Landing”?
One of the Federal Reserve’s main goals in bringing inflation under control is to achieve a soft landing. In this scenario, inflation rates return to the Fed’s target of 2% year over year without plunging the U.S. economy into a recession.
However, because inflation has remained stubborn while our gross domestic product (GDP) continues to rise, economists are now using a new buzzword: no landing.
A “no landing” scenario would indicate robust economic growth while inflation remains hot — despite the Fed’s best cooling efforts.
According to the Bank of America’s (NYSE: BAC) Global Fund Manager Survey, which gauges economic sentiment among 300 fund managers around the world, the no-landing scenario is looking more and more likely by the day.
In April, 36% of respondents chose “no landing” as the most likely scenario for the next year. Back in January, that percentage was just 7%.
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