The Tide Has Turned

The Fed has said it: interest rates are coming down. Fed Chairman Jay Powell surprised markets in early December when he announced, somewhat unexpectedly, that the Fed was not planning to raise rates any further, and, in fact, was projecting three rate cuts in 2024 now that inflation has cooled. 

Surprisingly, the Fed’s quarterly economic projections released in December, the first set since September, also showed that central bankers expect inflation to fade slightly more quickly than officials had previously forecast, hence the policy pivot. Fixed mortgage rates fell for the seven weeks in a row by mid-December, with the expectation they would fall further by the time this column appears, as inflation keeps moving slowly in the desired direction.

Fixed-Rate Mortgages. Rates on fixed-rate mortgages have declined without a break, through three sets of holiday decor. They started dropping around the time people were putting away plastic skeletons, kept falling while folks were setting out their Thanksgiving centerpieces and are still going down as neighborhoods are illuminated with twinkly lights.

When you add those weekly declines together, they are substantial. At press time, the 30- and 15-year fixed-rate mortgages have fallen almost a percentage point since late October, and the five-year ARM had dropped almost a quarter of a percentage point.

Interest rates often move in the same direction as the inflation rate, so it’s no coincidence that mortgage rates have gone down at the same time the inflation rate has fallen. The consumer price index fell from 3.7% in September to 3.2% in October, followed by a further fall to 3.1% in November.

Fed discount rates are currently set to a range of 5.25% to 5.5%, where they have been since July. After making a rapid series of increases that started in March 2022 that pushed borrowing costs to their highest level in 22 years as of this summer, officials have now held policy steady for three straight meetings.

Taking a Patient Stance. Policymakers are striking that patient stance to give themselves time to assess whether interest rates are high enough to weigh on the economy and ensure that inflation will slow to the Fed’s 2% target over time. Price increases have been cooling for months and hiring has slowed, which has been giving officials more confidence that their current setting may be sufficient.

Powell emphasized that inflation has eased from its highs, and this has come without a significant increase in unemployment, which is the best possible economic news. As many of you know, I have sung Powell’s praises throughout the two-year run-up in rates, agreeing with his fight against an inflationary tiger he has gotten under control without precipitating a recession, a move reflecting his deft management of interest rates and its soft impact on the economy. He should be considered for the Nobel Prize in Economics, his handling of the economy was so exceptional. 

And markets reacted very positively to the news. Stocks and bonds soared in the fourth quarter of 2023 after the Federal Reserve signaled rate hikes are over and cuts are coming. By mid-December, the S&P 500 was less than 2% away from its all-time high last seen in January 2022, and the rally is broadening out from just big tech. And 10-year Treasury yields closed back below 4% for the first time since July; for the overall U.S. equities market, the 2023 return for stock prices had climbed to 24.5% by mid-December, more than offsetting the 2022 return of -18.1%.

Among the stars in the equity winners were just about all the publicly-traded construction materials stocks in our industry, both foreign and domestic. In fact, in mid-December, a component of the AVP Pulse Index had measured a whopping 44% average increase for construction material stocks this year as the outlook remains robust for a strong construction economy over the next few years. This falling interest rate environment will stimulate housing sales, and lower rates will spur capital spending throughout our industry.

Thanks, Chaiman Powell. What a masterful job of tamping down inflation and managing to keep the economy on a steady course. 

AVP Pulse Index. The final quarter of the year shows the Index up 0.6% for last month, and up 3.8% for the last 12 months. With our proprietary algorithm, a major upward pressure was exerted by the continued run-up in Industry Stock Prices, just as we witnessed last quarter.  The publicly traded companies that make up this metric are up 7.7% for the month, but a whopping 44% for the trailing 12 months.

Pierre Villere

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.

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