I bet you’ve never been so excited to see interest rates in the 6% range huh? So what was the catalyst to cause rates to drop so quickly? It all comes down to the usual suspects. Inflation and the job report for November were both below expectations. That’s not to say that inflation is at the target for the Fed, right now inflation increased 3.2% year over year and the Fed’s goal is 2%. However there are cracks finally showing up in the data. November’s job report increased by only 150,000 which is a sign that rate hikes are slowing job growth. December’s report came in at 199,000 which was just slightly above expectation. Most experts think that 150,000 is the sweet spot for jobs. It’s enough to continue moderate growth in the economy without triggering another rate hike. This is what would be called a “soft landing.”

If there was a word of the year award for economics this year it would be “soft landing.” That’s when there is modest growth in the economy, sustainable wage growth and inflation going back to 2%. The other options are a “hard landing” where rate hikes paralyze the economy and cause it to crash. Finally there is runaway inflation where the Fed doesn’t hike enough and inflation continues to go out of control. Currently it seems like we are threading the needle on our way to a soft landing.

One word of caution, if you look at inflation in the 70’s there was a steep drop in inflation only for it to increase again. That’s not to say that will happen again but it is an important reminder that the market is narrative driven. Right now the narrative is that the Fed will have to cut interest rates next year, perhaps multiple times. If inflation continues to get stuck around 3% or if job growth accelerates that could change the narrative just as quick. As of now though optimism is ruling the day and I don’t see that changing in the near future. History shows that rates start to drop once the Fed has stopped raising interest rates and there is a chance we have seen the last rate hike this cycle.

Recap:

-Inflation is showing signs of moderation, job growth is slowing

-The Fed could be done rate hiking for this cycle

-Market is thinking Fed will cut rates multiple times next year

-Mortgage rates tend to drop after rate hikes stop