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Quiton: Welcome back to the What's Your 1 More Podcast. I'm your host, Quinton Harris. You're dialed in for the most recent episode here at What's Your [00:00:10] 1 More, man I'm excited to have one of our returning guests, as always, bringing great [00:00:15] energy and knowledge and you're in for a treat today. We just had a Federal Reserve meeting last, uh, excuse me, [00:00:20] yesterday and, uh, there's a lot to talk about, a lot to break down and, uh, we brought one of the best.
The show to do [00:00:25] that. And not only that, we're gonna get some bold predictions here at the end of the show going into 2026. And I wanna remind you, [00:00:30] last year they ended up dead on the money with some of their predictions. We'll kind of recap that a little bit today. I'm not gonna play [00:00:35] the I told you so game, but you know, when you're good, you're good.
And so we're gonna talk about that today, Mr. Dan Habib. [00:00:40] Welcome back to the show, my friend.
Dan: Quinton. Thanks so much for having me, brother. It is always an honor to be [00:00:45] on the, what's your One more podcast here with you, brother.
Quiton: Welcome back. So we just got [00:00:50] done with the fed meeting and inside that meeting we kind of had a different tone from, uh, this committee.
It [00:00:55] seemed a lot more dovish than normal, and even Mr. Powell himself kind of brought the, uh, the doves out in [00:01:00] this one and really headed off a lot of things. And we finally saw what you guys have been talking about for a long time, which is, Hey, listen, [00:01:05] these numbers and employment don't look great. Uh, and we're gonna break that down.
I'm sure you got some charts and [00:01:10] things to show us, but lots of negative revisions kind of finally added up and came to the podium and it was like, [00:01:15] oh, here we go. Everybody look out. It's, these aren't as good as we thought. And then we saw other committee [00:01:20] members step up and kind of say, listen, we agree.
And then we obviously we have the few like Bostic and some other ones that [00:01:25] still are gonna stay their course, but they're on the way out. And I'm sure you'll talk about that as well. But the good news is [00:01:30] we did get a rate cut. I'd love for you to kind of break down to the audience why that didn't necessarily reflect in.
[00:01:35] Immediate mortgage relief. It's on the way, but why it's not there today, we tend to see a lot of [00:01:40] fallacies in the environment where people go, Hey, fed cut rates, we should get lower mortgage interest rates. And it doesn't always happen like [00:01:45] that. So I always love getting your insider knowledge on that and talking a little bit about this fed as we head into the 2026 [00:01:50] year.
Dan: Yeah. So listen, there's a lot to unpack. As you said [00:01:55] yesterday, the Fed as expected cut 25 basis points, and you might [00:02:00] remember at the October 29th meeting, they were expected to cut 29 basis points. [00:02:05] They did, but then Powell, he really made it a hawkish cut. [00:02:10] And the bond market hated it. After it, he cut rates.
And the reason being is, [00:02:15] is going into the October 29th meeting, the expectation was that the next fed meeting, [00:02:20] which was yesterday's, was that they were gonna 100% cut. But instead of going [00:02:25] ahead and alluding to that at the October 29th meeting, Powell cut and he said, well, [00:02:30] a rate cut December 10th, that's not a foregone conclusion far from it.
And the market took [00:02:35] that as really hawkish. Now listen. They ended up eventually cutting December 10th or [00:02:40] yesterday because of the weakness in the labor market. But at the time of that October 29th [00:02:45] meeting, that was a really hawkish statement that he made going into yesterday's [00:02:50] fed decision. The market wasn't expecting him to say, oh, we're gonna cut rates in [00:02:55] January.
The market was pretty much prepped for a hawkish cut for Powell to cut rates, [00:03:00] but then to set the bar higher for any future cuts. And that's pretty much [00:03:05] exactly what he did. But then his statements that he made, I think he was much more do [00:03:10] than the market was expected. In fact, he went out of his way to talk about, as you [00:03:15] correctly said, the weakness in the labor market and to downplay inflation.
You know what, let [00:03:20] me go ahead and just share with you this slide here to go through some of the points here together to help you [00:03:25] kind of see this. So yeah, I love this stuff on the labor market. Powell [00:03:30] said that not only is it not solid anymore or stable, he said that [00:03:35] it is certainly showing signs of weakness.
Now, he went as far as to say that [00:03:40] from April to September, which is the latest jobs report we got because of the shutdown, [00:03:45] we won't actually get the October and November jobs reports until next week on the [00:03:50] 16th. So they went into this somewhat blind along with the CPI inflation report, [00:03:55] but he said from April to September.
We've seen on average 40,000 job [00:04:00] creations. But then he said that he believes, as we've been saying all along, the BLS [00:04:05] has this systemic error where they're over counting jobs, [00:04:10] overstating job growth, and he thinks that's 60,000 of an [00:04:15] overstatement per month. So he went on to say that I think we're really seeing, give or take 10,000 [00:04:20] jobs, plus or minus.
About 20,000 job losses each month [00:04:25] and something a lot of Fed members have been making. The argument of is, well, labor [00:04:30] demand and job creations have been low, but at the same time because of immigration changes, we're seeing [00:04:35] less labor supplies. So you don't need as many jobs to be created to keep the unemployment [00:04:40] rates stable.
You know, that's all well and good, but never seen negative numbers keep the unemployment rate [00:04:45] stable. And he went to go ahead and really underscore that point. So it was actually quite, you [00:04:50] know, validating for us to see him say that. And also on inflation, because [00:04:55] a lot of people get confused with prices being high and the current rate of [00:05:00] inflation being out of control.
Of course, inflation is [00:05:05] cumulative. That is a real thing. What that means is, is that the price increases of [00:05:10] 25% from the last few years. Those are all still there, but what we're really [00:05:15] focusing on here is how much your price is going up right now on top [00:05:20] of that, you know, that's the scary thing about inflation.
Once you get it, you don't really ever [00:05:25] erase it. Unless you see some kind of catastrophe, terrible recession, where [00:05:30] temporarily prices can go down a little bit. And of course, certain sectors, I mean energy prices are [00:05:35] coming down. Sometimes you could see food be volatile, but in aggregate, prices always usually just go [00:05:40] up.
And right now the current rate of inflation is 2.8%. That's above the Fed's [00:05:45] target, but by no means is it outta control, especially when you really look at some of [00:05:50] the overstatements that are happening. And Powell said just that he said that when you strip out [00:05:55] the impact of the tariffs, inflation's actually closer to their 2% target, not [00:06:00] far from it.
He said services inflation's coming down, but that's being offset by [00:06:05] goods inflation going up. But he said it's only in the sectors where the tariffs have an [00:06:10] impact. And he said he thinks that the tariff impact is going to peak in Q1 of 2026, and then you're [00:06:15] gonna start to see that being more of a downward force.
So as long as there's no new tariffs that are announced, of course. [00:06:20] So he was really, really dovish on both the labor market. As well as inflation. [00:06:25] And then of course the surprise wild card out there was that starting tomorrow, which is the [00:06:30] 12th, the fed's gonna be buying $40 billion a month in [00:06:35] treasury bills.
And if needed some potential maturities of three [00:06:40] years or less as well. A bill is one year or less, so they might be buying some two year or three year [00:06:45] treasuries as well. But you know, that was. Surprise, especially the [00:06:50] amount, there was some talks that they might do, some buying to help with some liquidity issues and to [00:06:55] make things function smoothly.
But you know, 40 billion was more than anybody had talked about. Now, are [00:07:00] they gonna do that into eternity? They said in their statement that they're going to be buying it for the [00:07:05] next few months at 40 billion, and then potentially turn that down. But. It depends what's happening [00:07:10] in the economy, right? So this is a type or form of qe.
[00:07:15] It's not the same kind of QE for those of us in mortgage and real estate where they're buying, you know, 95 [00:07:20] billion a month in mortgage-backed securities and treasuries. They're not buying long dated maturity [00:07:25] bonds or treasuries. But they're buying bills. But it's still stimulative, it [00:07:30] still does create some liquidity.
I think it's probably a good thing for risk on assets as well, like [00:07:35] cryptocurrencies in the stock market. And you know, as we're talking here, I think I saw on the screen there that it was the [00:07:40] s and p and the Dow hit new all time closing highs today as a result of this. Correct. Um, [00:07:45] but you know. This is something that can really help us if Treasury [00:07:50] Secretary Scott Bessant terms our debt shorter.
You know, one of the big headwinds [00:07:55] for mortgage rates is that we have this unbelievable debt load. I think it's [00:08:00] around 37 trillion now. We continue to deficit spend, so it keeps getting bigger and you know, we don't have like a [00:08:05] printing press, literally like people think, but. We come up with this money [00:08:10] by issuing debt in the form of treasuries that has to get absorbed by the bond market.
Well, if [00:08:15] you're issuing a lot of 10 year treasury notes, 20 year bonds, 30 year bonds, [00:08:20] that'll hurt mortgage rates more directly. But if you're issuing more debt on the [00:08:25] short end, that won't have as much of an impact. So this can really help us indirectly where hey. [00:08:30] If they do term the debt shorter, you certainly have a big source of demand there [00:08:35] now from the Fed, along with things like bank deregulation and stable coins as well.
[00:08:40] So this was another kind of dovish part of this fed meeting. [00:08:45] Now, one thing Powell did do is he did raise the bar for future cuts and he said that he [00:08:50] thinks the neutral rate. Which, listen, the Fed could be one of three things. They can be [00:08:55] restrictive where they're really, their Fed funds rate is at a level that it's kinda clamping down on [00:09:00] economic activity.
They could be neutral where they're not helping or hurting the economy, [00:09:05] or they could be accommodative where their Fed funds rate is low enough, where it's actually stimulating the [00:09:10] economy. Now, when you're at an accommodative standpoint, you have to worry about are we potentially [00:09:15] stoking the flames of inflation?
So a lot of Fed members have kind of differing views [00:09:20] on where neutral is. Some that you see that want more rate cuts and a lot [00:09:25] more like, uh, Steven Moran. Well, he thinks the neutral level's much lower, which is why [00:09:30] he wants to see next year, you know, like six cuts. But [00:09:35] that's not where by. Bulk of Fed members are right, but he did [00:09:40] Powell say that he thinks that we're now, we're now in the outer bounds of neutral [00:09:45] meaning, you know, we're getting within that territory, which leads you to believe that he doesn't think there's much more [00:09:50] room to cut unless one of two things happens.
If inflation comes [00:09:55] down, well then you have more room to cut because you're less restrictive or. If the labor [00:10:00] market takes another move to the downside where they have no choice, where they have to step [00:10:05] in, otherwise, you know, if the labor market unfolds, it's, it's a really bad scenario. So [00:10:10] it did set the bar a little bit higher and you know, this fed is the [00:10:15] most divided that I can remember seeing, uh, since I've been analyzing this [00:10:20] stuff, which is, I don't know, around 18 years or so.
And Austin Goolsbee, the Chicago Fed [00:10:25] President boy, it wasn't too long ago. He was like the most dovish fed member. I remember, I [00:10:30] think it was earlier in the year, he said that he thought the Fed had room to cut seven times. Well, [00:10:35] the Fed now cut three times and he was against this third cut. So [00:10:40] much so that he dissented.
And Schmid is kind of like the Grinch who stole Christmas. He [00:10:45] dissented at the October 29th meeting as well as this meeting. And then of course you had Stephen Miran. [00:10:50] He dissented but not 'cause he didn't wanna cut, but because he wanted a 50 basis [00:10:55] point cut outta 25 and he did the same thing at the October 29th meeting as well.
So [00:11:00] this is the Dots plot chart. And before we get into this, I just wanna mention, and we're gonna go [00:11:05] over what the changing kind of landscape is gonna be at the Fed. 'cause I think it'll be interesting and [00:11:10] important. You know, the Fed doesn't have all the data going into this meeting, and the composition of the Fed is [00:11:15] going to change drastically next year, especially in May when Powell's term is up [00:11:20] and you're gonna get a new Fed chair who we know is going to be more in line with what [00:11:25] President Trump wants to see, which means that.
He's going to be more inclined to cut rates. So [00:11:30] you have to kind of take some of this stuff with a grain of salt because with the makeup changing that much, they're only [00:11:35] gonna be there, the current Fed chair for the next three Fed meetings, and then it's gonna [00:11:40] change completely. So here's what the dots showed, and I thought this was interesting for the current year.
So [00:11:45] you have the 19 fed members. They anonymously plot where they think the Fed funds rate's gonna [00:11:50] be. This year, 20 25, 20 26, and you can see in the longer runs, but for [00:11:55] 2025, so this one here, this is the current Fed Funds rate, by the way, that after [00:12:00] they just cut, it's now between three and a half and three, three quarters percent.
The effective [00:12:05] Fed funds rate splits the difference at three and five eight or 3.625. So you could [00:12:10] see here's all the Fed members. Some of them are voting, some of them are not. 'cause remember, there's 12 voting Fed [00:12:15] members. There's 19 in total. All of them get a dot, but this is voting for the rate [00:12:20] cut that happened.
This is Steven Miran who wanted a 50 basis point cut. But look at this. We know [00:12:25] that there was two Fed members that dissented outright, but then you have four dots here. [00:12:30] Sometimes what the Fed members do is they more quietly dissent, which means that [00:12:35] if this is a voting member up here, which a few of these definitely are.
They ended up falling [00:12:40] in line with the Fed chair when it came to vote, but they're showing their dismay for the cut by [00:12:45] putting the dot above where it is because listen, this is 2025. There's [00:12:50] no possible way that you could get here after the rate cut. Okay, and then here's 2026. So [00:12:55] this is where we are currently.
Now, interestingly of the current fed makeup. [00:13:00] Three fed members want to see a 25 basis point hike. Four. Want to see one? Cut, [00:13:05] another four. Want to see 2 25 basis point cuts. Two. Want to see three. One [00:13:10] wants to see 1% in cuts. And then Steven Moran down here wants to see 6 [00:13:15] 25 basis point rate cuts. So you can see this is a very, very divided fed.
Very, very [00:13:20] spread out. So. You have 12 voting Fed members, right? And you have all the Fed [00:13:25] governors and the chair who vote. You always have the New York Fed President who votes. And then you [00:13:30] have these four rotating, uh, regional fed presidents that [00:13:35] vote. So the ones that are voting now is you have GULs by Schmidt, Collins [00:13:40] and Musalem, right?
St. Louis Chicago. So Gouldsby, [00:13:45] we know he was one of the outright dissenters, so extremely [00:13:50] hawkish. All of a sudden, uh, now he's out and we're gonna replace him with hammock. And by the [00:13:55] way, hammock somebody that, uh, is definitely leaning hawkish, but not as [00:14:00] hawkish as Goolsbee. You have Schmid who we know.
That's the Grinch that dissented at the last two [00:14:05] meetings gonna be replaced and. The people replacing, the people going out. [00:14:10] Definitely have more of a dovish tone if we look in aggregate here, right? [00:14:15] So these four people replacing these four, the Fed definitely gets more dovish, but I want you to just take a look [00:14:20] at the full breakdown of who we're gonna have next year.
So the Fed chair. We don't know [00:14:25] exactly who it's gonna be. Trump's playing a little bit of games. It sounded like it was Hasset. Now he's saying he's undecided. [00:14:30] He's meeting with Warsh and Waller. Again, it's gonna be one of those three. Everybody thinks it's [00:14:35] Hasset, but you know, sometimes Trump likes to keep people on their toes, and now he's saying he's undecided.
But [00:14:40] nonetheless, any of those candidates, the one he is gonna choose, all [00:14:45] three of them are in line with the thinking that. We are going to have more room [00:14:50] to cut. They think our star, the level of neutral is much lower, and I'll show you what I mean by that in [00:14:55] just a minute. So whatever fed president goes in there.
They are going to want to cut [00:15:00] rates more, much more than Jerome Powell. Now listen, of course, some of these [00:15:05] people like Hassett were asked, well, are you gonna succumb to presidential pressure on cutting? What is the guy gonna [00:15:10] say? Yeah, of course he's going to say no. Right? But he did say even after the cut [00:15:15] on yesterday at yesterday's meeting, I still think there's a lot of room to cut.
And [00:15:20] we do have to be careful because too much of a good thing is a bad thing, and we'll go over that as well. And then you have the [00:15:25] New York Fed President, influential 'cause that's where they do all their operations, right. And their purchasing [00:15:30] operations. Uh, John Williams, the New York Fed President always votes.
And then you have Bowman, [00:15:35] who is dovish? You have Waller who's one of the candidates for the next Fed chair who's dovish. You have Miran, [00:15:40] who is the super dove, and then you have the Vice Chair Barr, who is kinda like a [00:15:45] centrist slash unknown. And centrist means. You know, they're kind of in between a hawk or a [00:15:50] dove.
And then you have Jefferson Kashkari, Paulson, all kind of in that centrist to [00:15:55] unknown. And then you have Cook Hammock and Logan who are hawkish. But you can see here, you know, [00:16:00] from the voting members, you're definitely gonna have a more dovish fed. And of course [00:16:05] the Fed chair holds a lot of sway. You know, you look at all the meetings that we see, it's unusual to see [00:16:10] one or two dissenters even, right?
Because the fed chair usually is able to convince them. [00:16:15] The kind of following along and voting with him or her. Right? So this is [00:16:20] something that it's certainly lining up to be a more dovish fed and we're going to see more rate [00:16:25] cuts next year. Even though if you look at the dots plot chart for what [00:16:30] their, what the median is here, it's for one more cut in 2026.
Do I think that's [00:16:35] accurate? Absolutely not. I think we're gonna see probably at least three rate cuts in [00:16:40] 2026. But of course, the caveat. It depends what happens with the labor market. And it depends what happens [00:16:45] with inflation. If all of a sudden you saw inflation really starting to pick up steam, I don't care who the Fed [00:16:50] president is, you can't cut into that.
And, but if you saw the labor market deteriorating, you [00:16:55] might see more cuts than that, right? But nobody would be foolish enough to cut into a [00:17:00] really accelerating inflationary market. You just can't do that now. Some other things [00:17:05] within their summary of economic projections from the Fed. This is something they release every other [00:17:10] meeting.
Again, you have to kind of take this with a little bit of a grain of salt because the Fed composition's gonna be very different next [00:17:15] year, but with the existing members, they think inflation's coming down to two point a half percent next [00:17:20] year. And they think the unemployment rate is gonna go to 4.5% by the end of this year, [00:17:25] and then next year they think it's around, uh, 4.4% and they think GDP is gonna [00:17:30] pick up next year to 2.3%.
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Quiton: So we're [00:18:35] looking at the dot plot map and we talk about a new dovish fed composition.
[00:18:40] Let's break that down for our audience. Layman's term, what does that mean for the buyer? [00:18:45] Potential sellers, mortgage lenders, real estate agents? I mean, are we [00:18:50] thinking lower rates? And if so, what are we thinking that looks like? Or is it gonna be a [00:18:55] delayed reaction to what's happening right now?
Dan: So let's talk about this, right?
So first [00:19:00] off, what's a dove? What's a hawk? What's a centrist? Right? So a dove is somebody that would be [00:19:05] more for accommodative economic policy, which means that they would be more in [00:19:10] favor of cutting rates or potentially more in favor of something like qe, although I don't think many [00:19:15] fed members really are, are, you know, looking towards that or in line with like a big QE [00:19:20] effort, unless it was like, you know, a COVID or, or a really bad recession type scenario.
A [00:19:25] hawk is somebody that wants tighter monetary policy. They're more concerned with inflation right [00:19:30] now, you know, less attention to the labor market. They're less likely to hike rates. And then a [00:19:35] centrist is someone that's kind of in the middle. So let's talk about how the Fed can [00:19:40] really influence mortgage rates, right?
Because they are not cutting the 10 year treasury. [00:19:45] They're not cutting 30 year fixed mortgage rates. They are cutting the Fed funds rate. Now, that is [00:19:50] not a long-term rate. It is a very short-term rate. It's actually an overnight rate that [00:19:55] banks use to lend to one another, but it does have a direct impact on short-term rate.
So when [00:20:00] the fed cuts. SFR goes down, uh, your money market accounts go down, your [00:20:05] short-term treasuries, your credit card rates, your car loan rates, things like that. But [00:20:10] long-term rates are more indirectly impacted. Now, a lot of stuff I see out [00:20:15] there, people look to 2024 and they're like, well, the fed cut and rates went up.
And [00:20:20] you know, listen, you can't just look at things myopically. You can't look at what happened [00:20:25] immediately after the Fed cut rates and say, that's the full reaction. Because when you learn, the fed's gonna cut. [00:20:30] Markets are forward looking and they move in advance almost always. [00:20:35] So you have to look to see how the Fed rate cut is impacting things by looking at, I think, three [00:20:40] things that are most important, right?
Number one is how does the market react in advance of [00:20:45] the cut once they learn about it? Then is there any coincidental economic [00:20:50] reports that are released after the rate cut that are causing rates to go higher, not necessarily the fed [00:20:55] cutting rates itself. And thirdly, and potentially one of the most important parts is.
Is the [00:21:00] rate cut being deemed as inflationary or thought of as inflationary? Because I [00:21:05] said before, too much of a good thing can be a bad thing. Listen, I think there's still some room to cut rates. [00:21:10] Personally, I think you could definitely cut two or three more times next year and not get to a level [00:21:15] of neutral where you're, you know, not get to accommo of levels where you're stoking flames of inflation or [00:21:20] anything like that.
But agreed, if you were to cut to like where President Trump says you want to [00:21:25] see. That would be problematic. You can't cut the Fed funds rate down to [00:21:30] 1%. Okay. That would be crazy. And it would have actually the opposite impact [00:21:35] of what they're trying to accomplish because they say so much how they want affordability in housing.
They wanna see rates come [00:21:40] down. There's certainly not a direct correlation there. There's an indirect one, and I'll show you that correlation in a [00:21:45] second. But if you were to cut that much, the bond market would tighten for them and you would see [00:21:50] long-term rates move higher because it would be thought as inflationary.
So let me show you a [00:21:55] little bit about what I'm talking about here, and I think it will make some more sense. So first things [00:22:00] first. You know, you hear me talking about restrictive and uh, different. Levels of what [00:22:05] that their policy can be at. So I think this is somewhat helpful, right? You, you know, you have, you might be wondering [00:22:10] why do some Fed members think there's so much more room to cut than others, right?
So here's a [00:22:15] calculation on how you figure out how restrictive the Fed is. And this was [00:22:20] actually before the Fed's cut yesterday, right? So the Fed funds rate was at three and seven eights. [00:22:25] The level of inflation currently is 2.8%. There's something called R [00:22:30] Star that gives you an idea of how restrictive things are in the economy.
That's a variable one where [00:22:35] you know the super doves out there think this is lower. This is kind of like a median [00:22:40] here where most Fed members think it is. You put all this together and most Fed members would [00:22:45] agree that you know, the Fed is still even after the cut, restrictive by at least 25 basis [00:22:50] points, right?
What influences this? Well, the R Star estimate and [00:22:55] inflation. And while inflation's 2.8%, even Jerome Powell himself [00:23:00] said it's really closer to 2% when you remove the temporary impact of tariffs. And here's just [00:23:05] some of the impacts. Look, core PCE is two eight. But shelter's overstating it by three-tenths.
The [00:23:10] tariffs overstating it by, by at least three-tenths, may, probably four-tenths portfolio management, which is a [00:23:15] really stupid metric where, you know, if you have an investment advisor charging you, let's say [00:23:20] 1% on your portfolio and your assets go up, and now you're paying a more. They count that as inflation, [00:23:25] the rate they're charging you hasn't gone up.
In fact, you're happy to pay them more. 'cause that means that your assets have [00:23:30] grown in value. But they count that as inflation. But you add this up, and this is where I think real core PCE is a [00:23:35] lot closer to, a lot, closer to 2%, maybe even under it. So if you were to use this. [00:23:40] In this calculation, well then it shows you that you actually could cut one point a [00:23:45] 5% almost, or at least one and a quarter percent before getting to levels [00:23:50] of neutral.
And that's the reason why you see people like Steven Mirin who [00:23:55] thinks that you can actually cut more than this because his number of our star is actually even a little bit lower. So [00:24:00] that is kind of why, the main reason why there's such differing views out there. Some are more worried about [00:24:05] inflation, some more worried about the labor market, but really the level of restriction.
It's something [00:24:10] that's not concrete and there's a lot of opinions on that level based on the metrics [00:24:15] that I just showed you. But here's something I wanna show you on Fed rate cuts. So. You know this [00:24:20] points to 2024, and I think it underscores what I was trying to explain before. So if you remember [00:24:25] back to last year, September 18th, which is right here, this was, this is the Fed funds [00:24:30] rate.
This was the 50 basis point cut that occurred. Now a lot of people, I [00:24:35] think, incorrectly point there and say, well, listen, rate cuts, they don't help at all because [00:24:40] mortgage rates ended up going up after the fed cut 50 basis points. But here's the thing, remember, [00:24:45] you can't just have a myopic view. What happened in the few weeks before the 50 [00:24:50] basis point rate cut.
Once the markets learned that the Fed was indeed gonna cut 50 basis points, [00:24:55] they moved down by five eights to three quarters of a percent on 30 year fixed rate [00:25:00] mortgages. Then the Fed cut right here, and you'll notice 30 year fixed rates. They actually remain stable for [00:25:05] two weeks. Then on October 4th, they started to move higher.
Now remember what I [00:25:10] said is there, you have to see what happens before. Well, clearly the long end, even here, [00:25:15] priced in rate cuts. Then was there coincident economic data [00:25:20] that caused rates to go higher? Well, we got a 254,000 [00:25:25] job creation report for the month of September that was released October 4th.[00:25:30]
That really started rates moving higher. You add to that November 2 27. [00:25:35] December 2 56. Now we were saying all along, and finally the QCEW confirmed this, [00:25:40] and now even Powell saying there's a crazy overstatement that 52% of these jobs from this [00:25:45] year never occurred and were bs. But you can have coincident economic reports that do [00:25:50] this.
I want you to pay attention to this long-term chart. Now, the blue [00:25:55] line is the Fed funds rate. The green line is 30 year mortgage rates. Now, by no means is this. [00:26:00] Exact lockstep, but I think you'd have to say that these certainly [00:26:05] do trend pretty closely together over time. So do I [00:26:10] think that the Fed cutting rates automatically means mortgage rates are coming down?
Absolutely not. But [00:26:15] do I think that, you know, it certainly does typically have an influence on [00:26:20] pressuring rates lower, especially over time. I do. So long as it's not viewed as inflationary. And so [00:26:25] long as you don't have some crazy economic reports that are coming out that are sending rates higher. And if [00:26:30] we just look to this year, the first cut, September 17th, you know, back August [00:26:35] 22nd, we learned at Jackson Hole that we were gonna cut.
So. If you look from [00:26:40] when we learned and the market learned to when they cut, 10 year yield, moved down by a quarter of a [00:26:45] percent, mortgage rates moved down by three eights, then they cut on September 17th because the labor [00:26:50] market was weak. What happened the next day? We got a really low initial jobless [00:26:55] claims report.
Then we got a really strong GDP and durable goods report and it was somewhat [00:27:00] contrary. Not exactly 'cause we're talking about claims versus jobs created, but it was somewhat [00:27:05] contrary to the reason why the Fed cut and that caused rates to start to move higher again. So, you know, it's a little bit of a [00:27:10] Rubik's cube and you can't just look directly after the Fed cuts and say, see, it doesn't help.
I do [00:27:15] think it does have influences. For sure.
Quiton: Hear a lot of people explain like that and go into kind of [00:27:20] depth. So I appreciate you doing that. The other thing is that I take away for people that are saying, Hey, rates are [00:27:25] gonna come down, or I'm gonna wait. You may be waiting a little bit. And the other thing I took away is that [00:27:30] markets price and everything.
Like obviously you're smarter than many people that [00:27:35] are in the room, right, right now, but you get it. But so are the people that are pricing this out. And so when I [00:27:40] take a look at this, I go, Hey, listen. If you're anticipating a rate cut to lower the mortgage rate, [00:27:45] that's already happened in the pricing. So don't sit back and go, I'm gonna wait again [00:27:50] another week.
It may come down. 'cause consumers do that.
Dan: I know, right? So. Like for [00:27:55] instance, with this meeting, you know, it was kind of back and forth with like pricing in the rate cut, right? [00:28:00] Like after Powell made his comments, there was like a 33% chance of a cut and then it started to edge higher. But [00:28:05] then the week of the meeting it was up to like 90%, but it was expected it was gonna be [00:28:10] hawkish.
But the rate cut itself usually does kinda get priced in, especially as you get closer. [00:28:15] But then the comments can change everything too. Right. So just like we saw October 29th, you know, you [00:28:20] saw rates starting to come down, going into that rate cut. And then all of a sudden, Powell delivered, the hawkish [00:28:25] cutting res went up.
So, you know, there's, there's a couple different components to it, but I will [00:28:30] say this, you know, I know we talked about this before, Quinton, before hopping on, I know everybody's probably [00:28:35] curious as to where we see rates going. Right. And um, I wanna just show you, kind of walk [00:28:40] you through. You know how I think about this.
So I do think inflation's going to come down, and I do think [00:28:45] the labor market's gonna continue to show weakness. Both of those things should be favorable for mortgage [00:28:50] rates. Now, here's the other thing is Scott [00:28:55] Bessett the Treasury Secretary, I. You know, he wants to see the tenure [00:29:00] Around three 90, he actually spoke with my father, Barry, and he gave him his target, which not far from our [00:29:05] target, which is around three 80 on the tenure.
So he said that there's a few things he can do to [00:29:10] do this issue. More short-term debt, which we talked about at the beginning of the call, but also something called bank [00:29:15] deregulation would be big, and I think it will be passed next year. You know, a bank, how do they make money? [00:29:20] We deposit our money, they pay us very little on our deposits.
And then they lend out [00:29:25] that money, or most of that money at a higher rate, and they make the spread. But right now, [00:29:30] as it stands. If they were to take deposit or money, uh, and go ahead and [00:29:35] invest it into treasuries and make a return there, it would limit how much that they could [00:29:40] lend out because there's certain capital ratios they have to have.
Bank deregulation, whether you agree with it or not, [00:29:45] would say, listen, treasuries are risk-free assets backed by the full faith and credit of the [00:29:50] government, so they shouldn't. So it would really open the door for a lot of reserves out there to be [00:29:55] invested by the biggest banks into treasuries. Especially on the short end and absorb [00:30:00] a lot of the supply.
The Fed also ended their runoff, so any [00:30:05] assets that they're getting that are maturing from mortgage backed securities, payoffs, whatnot, principal payments, [00:30:10] they go ahead and reinvest those now back into treasury bills. Any treasury is running off the balance sheet. They're [00:30:15] reinvesting back into treasury.
So their balance sheet is staying net neutral, but anything rolling off the balance sheet [00:30:20] that was rolling off, they're now reinvesting. You have the fed outright buying 40 billion a month in bills, right? So [00:30:25] if, if you could issue more short-term debt, boy, you can certainly provide less [00:30:30] on the long end and that would help rates come down.
'cause there's less long-term debt there to [00:30:35] absorb. Almost think of it as like, you know, if, if you had a housing market that all of a [00:30:40] sudden you were flooding with supply. Well, there's gonna be demand at some equilibrium price, but [00:30:45] when you have so much supply, the price or the demand level, it's gonna be at a lower price.
And in what [00:30:50] we're talking about here with this debt, a lower price means a higher yield, right? So, [00:30:55] um, and then one more thing is stable coins, which is cryptocurrency. And you might be like, Dan, how the heck can cryptocurrency [00:31:00] help us here? But stable coins, I think are really the future for transactions.
They bridge the gap between [00:31:05] the dollar and traditional finance and cryptocurrencies in the blockchain. And a stable coin [00:31:10] is like a crypto version of the dollar. It's pegged to the dollar and the way they peg it to the dollar. [00:31:15] Is 80 to 90% of what the stable coins own is short-term treasuries. So that market's [00:31:20] expected to explode, where I think by next year stable coins are gonna own a few trillion dollars [00:31:25] worth of short-term treasuries.
So you put all that together. Wait, it makes a lot of sense to issue shorter term debt. Those [00:31:30] things can help. But I also think we're gonna continue to see mortgage spreads come down. [00:31:35] Now, one of our forecasts we made at the beginning of the year was like a low in rates of. I think around six [00:31:40] and an eighth, we said, we said mortgage spreads would come down from two 80 to two and a quarter, and we said we see [00:31:45] appreciation around 3.5% or three percentage.
Yeah, I think we came very, very close on all those targets, [00:31:50] but the mortgage spread won. Boy, right now mortgage spreads, which is the difference between a 30 year fixed rate [00:31:55] mortgage and the 10 year treasury. They're right around two 12. So it's actually a little beneath our target, [00:32:00] and we wanna see this come down team, because this is the difference between the 10 year and mortgage [00:32:05] rates and throughout history.
Normally mortgage rates are 1.6 and 2% above the tenure, [00:32:10] but then you have periods of time where this widens, right? Where you had COVID, you had all the [00:32:15] QE and the Fed cutting rates to zero. You had the fed hiking and quantitative tightening. You [00:32:20] remember back here, uh, this was like October, 2023 where you had.
Uh, the 10 year at [00:32:25] 5% mortgage rates above 8%, it was like a 3.1 spread. I mean, that was [00:32:30] ugly. Part of the reason why you see that happen, something mortgages have that the 10 year doesn't [00:32:35] is servicing values, right? Where. There's a lot of things that go into valuing a mortgage, which [00:32:40] then in turn impacts the rate, right?
And if rates are really high, there's what? There's a [00:32:45] very big repayment risk. As soon as rates fall, you're gonna refi out of that sucker. So [00:32:50] there's very little servicing value in that mortgage. It's not expected to stay on the books very [00:32:55] long, and that's one of the components that can cause the spread to widen.
But then as rates come [00:33:00] down. More servicing value continues to enter into the equation, and you can see mortgage rates come down at a bit [00:33:05] of a faster clip than the 10 year, hence the spread narrowing. Well, right now we're around two [00:33:10] twelve, two fifteen, let's call it. I think we can continue to see that spread narrow next year.
[00:33:15] So I think we could see the 10 year hit our target of three 80 next year. We're gonna have, [00:33:20] I think some, some better inflation figures. I think the labor market's gonna continue to be weak. I think we're [00:33:25] gonna get a more dovish fed, obviously, and I think the 10 year can move down to three 80. [00:33:30] And if the spread narrows down to like 180.
Which I think is extremely [00:33:35] possible. I think that there's a chance we could get certainly under 6% [00:33:40] and maybe even touch like five and three quarters or so. Now, do I expect that to be like a [00:33:45] long, uh, you know, like a long time period that we're gonna be there? No. [00:33:50] So. It means that you gotta make sure you're putting in the work now, right?
Where you need to make sure [00:33:55] you have your ducks in a row. You're setting up strike rates with customers. You're keeping in front of your past database of [00:34:00] customers, right? And making sure that when rates do come down. You've already got them to [00:34:05] kind of pre-commit. And also as the fed cuts, remember adjustable rate [00:34:10] mortgages, SOFR comes down and such.
You know, there's a lot of companies I talked to that have attractive arm [00:34:15] products right now, but you're gonna see arms likely continue to get more attractive as the fed cuts [00:34:20] and the yield curve steepens. And I think that, um, there are great, great option. You know, there was people out there [00:34:25] like Bill Ty saying you should do a 50 year mortgage, which.
I don't think it's a great [00:34:30] idea. I do like the, uh, idea that they're trying to get creative, right. But I don't think that's a very good one. [00:34:35] However. You know, if you educate your customers on arms, you could probably get the [00:34:40] same savings that you would see in rate and such, but in much better situation for them.
And then when you [00:34:45] use a tool like MBS Highway and you quantify for them that, listen, even in a worst [00:34:50] case scenario, it's mathematically better for nine years, not just the seven years of the seven year [00:34:55] arm, let's say. Or if you use a historical scenario, it may never be better than. Uh, the 30 year may never be [00:35:00] better.
You know, you can really get the customer comfortable with it.
Quiton: No, I think that's great, and I think that [00:35:05] 2.12 spread is highly welcomed. I mean, we best we've seen what, since [00:35:10] 2022?
Dan: Yeah. It's the best spread we've seen in a while, but we're still well above [00:35:15] historical norms, and I think we can definitely get under 2% as far as the spread next year.
And we [00:35:20] think it's gonna get down towards 180.
Quiton: This time last year, I think we were at 2.72, so [00:35:25] to see it drop that much in a year is great. Two 80. Yeah. So I mean, to get in that 5, 6, [00:35:30] 5, 5, 7, 5 range, to your point, how long, right. I think the spreads are getting [00:35:35] better because we've been more consistent in the rates.
And to your point, that servicing's become more valuable, the [00:35:40] investor uncertainty is kind of going away. So the question is. At this 5, 7, 5, is it one of the things like where you go [00:35:45] up and you touch the rim and you hang on and you come down? Or is it more of a longer journey and now time will [00:35:50] tell? Yeah,
Dan: I don't think anybody knows for sure.
I certainly don't, but I do [00:35:55] think it's a level that we can certainly get to, uh, as far as like a low for the year. Right. [00:36:00] But I think we could spend some time under 6%. Right. And, and I think as a low target. [00:36:05] I feel pretty comfortable saying like five and three quarters, but I don't [00:36:10] anticipate that you're gonna have like a long period of time there, which is why I think [00:36:15] that you know, you need to be prepared.
For that opportunity when it presents itself. [00:36:20]
Quiton: Yeah. No, great stuff. Well, Dan, thanks for being on the show. I know you've got, uh, [00:36:25] some plans here. You gotta hop off, but man, as always, it's wonderful having you on the show, guys. All these charts, all the [00:36:30] breakdown, everything he did will be on our YouTube channel.
What's your, one more, Dan made a mention there of [00:36:35] something that I don't want. You have to think about NBS Highway. If you're not using this product, you are missing out. It's an [00:36:40] industry leader. The strike rate home report list reports, it's the, it's the, it's the trio [00:36:45] package. You cannot not work in this business and not have a part of that.
So, Dan, thanks as always. Being able to [00:36:50] show brother, man, it's great getting your insight, your resources. I appreciate you being on here. And you heard it here first. [00:36:55] 5, 7, 5. We're gonna get there. How long we stay, who knows? But till then, Dan, thanks for being on the show, brother. [00:37:00]
Dan: Thanks for having me.
[00:37:05] [00:37:10] [00:37:15]
