The recent indication from the Federal Reserve to hold off on rate hikes and potentially move toward quantitative easing has sent shockwaves across financial markets worldwide. 

This decision, which we refer to as 'the pause heard around the world,' could have far-reaching implications, particularly for the real estate market.

The Impact on Mortgage Interest Rates

Mortgage rates often correlate with the 10-year treasury yield, although the relationship isn't always direct. The Fed's decision could likely cause the spread between the two to decrease significantly, making mortgage rates more directly proportional to the 10-year treasury yield.

Currently, the 10-year treasury yield stands at 3.72%, a figure which, in normal circumstances, would not equate to mortgage rates reaching the high six to seven percent range. The significant spread between the two is overinflated, and the Federal Reserve's pause is expected to bring this spread down.

The Anticipated Cliff

The Federal Reserve's pause could signal an impending 'cliff' – a moment of stark change. The current overinflation of the spread is likely to dissipate, which will have a notable impact on the real estate market. 

Despite unexpected regional bank collapses and debt ceiling issues delaying this process, the forecast remains valid, albeit delayed.

The Inflation Rollercoaster

Once set in motion, inflation is hard to stop, and it's important to note that both Powell and Janet Yellen have previously called for inflation. However, managing inflation is a delicate task, and there's the risk of letting it get out of control. 

The recent shift in policy signals that the Federal Reserve is now trying to rein in inflation, but it may be harder to stop than anticipated.

The Signal for Quantitative Easing

As we look toward the next Federal Open Market Committee (FOMC) meeting, expectations are high for another pause. If this prediction holds, it signals that quantitative easing (QE) is back on the table. 

This return to QE will inevitably impact the mortgage interest rate 'cliff.'

While markets currently anticipate more rate hikes, they could be in for a surprise if quantitative easing is implemented. This could result in a windfall that most market participants aren't expecting.

Bottom Line

The Federal Reserve's actions clearly indicate that the economy may not be as robust as often portrayed. A rate hike could potentially sever the thin string that the economy hangs by, causing issues in our financial system. 

Despite what they say, the Federal Reserve's actions speak louder than words, indicating a cautious approach toward an uncertain economic future. This cautious approach to interest rate hikes and the potential for more quantitative easing signals the beginning of a new chapter in the real estate market.