Here comes the Fed
Greetings all. Bruce is on a special assignment this week, so I’ve been asked to step in again. Expect to hear from Bruce again next week. Until then, I have the pleasure of sharing some thoughts with you.
We last saw the Federal Reserve raise interest rates by .75% in July and with the most recent raise of .75%, this month to a target of between 3% and 3.25% leaves a lot of unanswered questions. The size of the increase has traders pondering what this could mean for future rate hikes with the Fed consensus seeing 4.4% by the end of 2022. With an increase of 75 basis points, this was right on the expectation, but it might indicate that the Fed foresees more headwinds in the economy. 30-year mortgage rates are likely to increase to around 7% and new applications should continue to cool. By comparison, a year ago 30-year rates were at 2.84% and a $500,000 mortgage resulted in a $2,065 principal and interest payment. That same loan today at 7% would require a $3,327 principal and interest payment. The $2,065 payment from a year ago can now support a $310,000 loan balance. As inventories continue to increase along with rates, we may start to see a decline in median home prices.
In other news, nearly five years to the day after Hurricane Maria made landfall in Puerto Rico, hurricane Fiona has done the same and has also swept through the Dominican Republic. Fiona is also expected to make landfall in Canada this weekend. More than two million people are without power or running water. Our thoughts are certainly with the affected and I can only hope that the disaster relief efforts are up to the task.
We continue to see the impact of supply chain issues. On Monday, Ford announced that they will finish the month with between 40,000 and 45,000 large pickups that will be unfinished due to a lack of parts. Ford is also dealing with rising prices from suppliers. These announcements follow similar statements from Honda and Toyota explaining that total production for the year is being scaled back. We can expect to see continued elevated prices and limited selection in the near future.
In closing, I wanted to share a story that I was encouraged to see. A company in Abu Dhabi is working on a new desalination device that doesn’t require electricity. It floats on water and uses sunlight to heat the saltwater causing the non-salt part of the mixture to evaporate. A gas form is then collected and cooled providing salt-free water. This builds on work done by MIT in 2020. One of the biggest challenges the company will need to overcome is how to scale the design to provide the volume of water needed by the people in the developing world.
John M. Gehri, CFP®, ChFC®