7.31.26 Reverse Mortgages; CATO Institute’s Jai Kedia on the Fed; High Bond Yields

Robbie ChrismanWelcome to the Chrisman Commentary Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include what's going on in the reverse mortgage space, further market reaction to the Fed's lack of reveal on Wednesday. Spoiler, 30-year yields have hit a 19-year high. And my interview with Cato Institute's, Jay Cata, on if the Fed's policy stance is getting closer to its target and the future of the central bank under Chair Warshh. Here, take a listen to a low preview. I'm loath to use this word. But how transitory do you feel like inflation is with what we've seen in the Middle East? Obviously, people know it'll take a while to rebuild oil stockpiles, even if the straight open fully tomorrow, sort of thing. Like I said, I'm I'm reluctant to use that word because it proved not that transitory last time. There's a wage price spiral and all that. Do you do you think that well I won't put words in your mouth? Thoughts on the train how a transitory. Jay CatoYeah, well, the you say that you you said my trigger word, which already gave me signal flares flying everywhere. Yeah. But but but to your point, let me let me maybe break this down. There's some parts of inflation that are extremely transitory. That particular part is energy costs, because energy is extremely volatile and the price of energy can change very quickly with very few sort of changes in the world. I think everyone listening to this podcast can already know what I'm saying. We've had oil prices change basically weekly at this point since the conflict in Iran began. It's precisely one of the reasons why the Fed prefers to look at a core measure of inflation rather than the headline, because the core excludes food and energy, both of which are pretty volatile. I'm not so thrilled about the exclusion of food, but the energy part at least I understand because it moves so quickly. So those things, yes, those things can actually get fixed very quickly if we have ceasefires or no war in the Middle East or the Strait of Hormuz is opened. All of those things can get fixed pretty quickly. But actually the danger sign is in the is in the underlying trend. So even if you look at core figures going back quite a while, uh core core PCE, the Fed's preferred measure, uh, has been over 3%, in fact, well over 4% for most of the year. That number doesn't seem as high because, again, most of us have lived through 9% inflation just a few years ago, but that's double the Fed's target or 1.5 times the Fed's target. Uh 50%. So the if if you're 50% over your target, are you really doing a good job? I'm not sure. Right. And and particularly because Warsh seems to understand this. And he's come in with a hawkish stance that we're going to bring it back down to 2%. And it's totally fine to have a conversation about what the target should be. Should it be 2% or any of those things? But I think that conversation has to wait until we bring that underlying trend inflation back to target. Robbie ChrismanPeople should keep in mind that the Fed dislikes deflation more than it dislikes high inflation, because that completely puts a clamp on the economy. Thanks to this week's podcast sponsor, Experian Verify, which provides mortgage lenders with automated income, employment, identity, and asset verification solutions that help accelerate underwriting while reducing fraud risk and manual documentation. I'm no numerologist, but Freddie Mac's announcement yesterday that 30-year mortgage rates are averaging 6.66% caught my attention. And maybe the devil's. Unlike rumors, like the one going around about a Texas IMB buying California IMB. Hard, provable numbers are hard to argue with. Like the hundreds of thousands of people every month turning 62. Setting up a reverse division at your company shouldn't be too difficult. And if you're asking why should lenders have a reverse mortgage division, housing wealth among homeowners aged 62 or older rose in the first quarter of this year to a record $14.92 trillion, according to the latest NRMLA/Risk Ban Reverse Mortgage Market Index, driven by an estimated $314.8 billion or 1.8% increase in senior home values, and partially offset by a $10.5 billion or 0.4% increase in senior held mortgage debt. And maybe it's a good time to do so, as there are plenty of questions surrounding the Federal Reserve's commitment to returning inflation to target, pushing long-term yields and inflation expectations higher. Fiscal concerns, elevated oil prices, and uncertainty over future policy are all weighing on long-duration bonds. Yesterday saw a fair bit of yield curve steepening, pushing the third-year yield to its highest level in 19 years. Investors digested Chair Walsh's message that markets, rather than Fed guidance, should drive financial conditions, suggesting the Fed is willing to wait for clearer evidence of persistent inflation before raising rates again. When long-term rates rise relative to short-term interest rates, this can improve lenders' net interest margins and make mortgage servicing rights more valuable due to slower prepayments. With long-end yields reaching fresh highs, we will shortly see whether selling pressure persists or begins to attract value-oriented buyers. The move in rates overshadowed softer than expected second quarter GDP growth and a modest easing in core PCE inflation as markets remain more focused on the Fed's evolving policy framework than on any single economic release. For today's interview, I wanted to welcome to the show Cato Institute's Jay Cata to talk about if the Fed's policy stance is getting closer to its target and the future of the central bank under Chair Warshh. He's a research fellow at the Center for Monetary and Financial Alternatives, and his research lies within the fields of monetary economics and macrofinance. It would be great if you could talk about your role at the Cato Institute, what the Cato Institute does, how you got into it, and what you like so much about it. Jay CatoYeah, it's a great place to work for me. I'm a libertarian, it's a libertarian organization. So we're a policy think tank catered towards getting the messages of free markets, uh limited government and peace out to the general populace to try to impact change on the hill, things like that. And I'm really happy that I can contribute. My expertise, of course, is in monetary and macroeconomics. Uh so I mean I never even imagined that I'd be working in a policy space because it's such a niche industry to find a mutual coming together of interests, both in terms of the alignment of the organization and my own values. And it worked out great for me that I get to work here. Um we may have impact in terms of reaching policymakers. Um, and I'm really excited to be here and kind of advocating for for a limited role for the government in my particular case for the Fed. Robbie ChrismanWhen it comes to the Fed, let's start with thoughts on on Chair Warshh. Uh the commentary that I've heard is that he's always screeched like a hawk, but voted like a dove. And I'm wondering your thoughts on on his appointment because it was thought, okay, maybe he's a bit of a puppet for Trump, but then he's reduced some of the communication, at least right in the the wake of the decision or in terms of the forward guidance with the dot plot. The minutes and the beige book still are are revealing a lot of info and about how the Fed is thinking. Thoughts on the Fed under his stewardship and what you now expect that to look like since we're a couple months into his tenure? Jay CatoYeah, it's uh so far it's been great, honestly. I couldn't really have asked for much more from a Fed chair. I know this might sound controversial or something like that, but I think people have to put into context what was going on when Warsh was nominated to begin with. Uh there was constant political interference at the Fed. President Trump was constantly yelling and criticizing Chair Powell. There was an open investigation into the chair over renovation costs. Uh, and I think that kind of backfired. Uh, there was so much pushback, both on the Republican and then, of course, on the other side, on the president and on his team, the people who thought it was wise to do these investigations, that it kind of narrowed the scope on who he could actually implement as a Fed chair to people that were actually serious about the job. So I understand it's difficult for people to now go back and give credit where it's due. But in the grand scheme of things, in the world of possible candidates, uh, Kimber Warsh is a great one. Specifically because we shouldn't forget the Fed has failed to bring inflation down to 2% in over five years. Uh, this is not an institution that's performing well and is in dire need of reform. So it's it's very refreshing, actually, to see a Fed chair come in with a regime change agenda and a particularly robust one that actually examines a whole bunch of different aspects of where the Fed is failing the U.S. public. So on those notes, uh, you know, no complaints from me. Of course, I always scoff when when a government agent implements a task force. Uh, so the proof is always in the pudding. So we have to see kind of what the task forces report and then how their agenda is actually implemented. But so far, however, you know, three months in, two months in, uh, it we're we seem to be in a much better place with monetary policy now than we were before. On the inflation front, yes, you know, he's always been a notorious inflation hawk. I don't necessarily agree that he would vote dovish. I think when he was on the Fed board, the Fed was a very different institution. This is pre-2000. Robbie ChrismanYeah, I should say, I should say Bernanke basically said he was a good team player and kind of went along with what everybody else was doing. Jay CatoAnd that's and that's pretty common for most people on the Fed board. You'll see these massive disagreements in their internal meetings, but then then when they present a message, because of course they try to control expectations to such a large extent, you'll see some smoothening out. And that's kind of the role of a good Fed chair as well, is to build consensus. So we'll see how that plays out because I'm guessing Warsh's views are quite different from any people on the FOMC currently. Uh, and you haven't seen a lot of sort of open-air uh fighting over any of his policy changes, mostly because I think they're good ones. Robbie ChrismanThoughts on what you would like to see from the Fed, maybe outside of the target Fed funds rate range, when it comes to runoff on its balance sheet or the composition of its balance sheet or its open market policy operations, what what do you think the Fed could be doing better? Jay CatoYeah, the number one thing is the balance sheet, which is completely out of hand. It affects all kinds of financial markets, including the ones that a lot of you a lot of your listeners are probably interested in, which are mortgage markets, although, of course, the mortgages have been coming down over time, at least as a percentage of their balance sheet. But this was never how the central bank was meant to operate. This is just essentially a central bank doing fiscal and financial policy under the guise of monetary policy. And I can kind of get into what I mean by that. So before 2008, you saw the Fed operate with a balance sheet that was only big enough to essentially do open market operations to get the federal funds rate to where it needed to be. It wasn't an actual tool of monetary policy. That changed with quantitative easing. Again, to note Warsh was one of the only people on the Fed that criticized it at the time. To your point, he actually did go ahead and vote for it. But he's been critical of that policy since then. And it was temporary, at least it was marketed as a temporary measure because everyone knew this could have disastrous consequences. And back then, so to give you a size of scale, the Fed's balance sheet was about 10% the size of all of US commercial banking. In the at the height of COVID, it was over 30%. It's close to 40% of US commercial banking. So when you have one institution that big that basically has no accountability in terms of profitability or things like that, or operating at a margin, they can really disrupt financial markets. And that's what you saw happen with the balance sheet constantly growing over time. Right. There's there's added problems with that. One thing is that because the balance sheet is so big, it's very easy for our fiscal government to spend money and then park the money at the Fed. So it reduces the incentive of our fiscal government to actually curtail spending. This is a huge problem that very few people talk about. It actually makes the Fed's job much harder on fighting inflation. Um, and all of these things are tied to that balance sheet being gargantuan. Uh, we need to bring that back under control. Now, of course, this is not something no serious person would advocate that we shed the balance sheet and bring it back down to whatever it was pre-2008 in a month, because building the balance sheet up is quantitative easing. So bringing it back down is quantitative tightening. So you want to be careful because that again acts as a monetary policy stance. But as long as it's done carefully and thoughtfully, uh it's it's essential that this is the key agenda for for the Warsh administration. Robbie ChrismanAnother remit under the Warshh administration, maybe that's the wrong way of phrase it, but but the Fed has has said we're going to become more data dependent. Or that's the forefront of their thinking that we're very data dependent, which in my estimation makes each subsequent economic release overly dissected and analyzed, and the market reacts maybe more than it should. But we've seen a lot of interesting data points here recently. Month over month retail sales, at least in June, when it was most recently released, rose at a pretty solid clip. May was revised upwards. Jobless claims are are very low at the in the low 200,000ths. Manufacturing indices are soaring, whether that's Philadelphia Fed, Empire State, so on and so forth. CPI and PPI inflation printed pretty tame. And I I wasn't going to go this direction, but for all the talk of the Fed not doing a great job, this this has been a pretty soft landing in a lot of sense. What do you make of what the economy is doing currently? Jay CatoYeah, I well, firstly, I'm not I'm not the kind of person that believes that the Fed changes a button and then the economy becomes exactly what it's supposed to be. You know, this this is this notion is absurd. There's trillions of economic decisions in between what the Fed does and then what happens in the in the labor market outcome. So kind of to measure the Fed's performance, you kind of have to be able to provide a benchmark and then measure it off of that. And that's kind of one of the issues, actually, with measuring the way the Fed has been doing its business, is we kind of don't know how they set interest rates. Uh, there used to be a time before 2008 where there was this academic business and Fed sort of consensus. Fed seemed to be following essentially some sort of policy rule, some sort of feedback mechanism from these data points into its interest rate mechanism. Uh and policy outcomes were generally good. The problem with the way it is now is that we have to have this debate, right? We have to then go through June, June CPI and May sales to final purchasers to make these decisions. And that's not how that's not how things work. Because of course, these are isolated data points. If you so my so my preferred metric is to look at kind of three-month aggregates and then analyze those. From those metrics, inflation has been running over 2% for quite a long time. Yes, June's inflation numbers came in softer, but that's again, it's temporary because we had a ceasefire in June in Iran that was no longer valid in July. Uh, by the time this podcast comes out, there could be a whole other uh uh situation developing there that we have no idea about. unknownRight? Jay CatoSo the Fed only really works when it's responding to these situations, not as a not as a means of ever achieving perfect outcomes. Coming back to your data point, I can I can kind of read that one of two ways. The first way is that the Fed is going to become more objective, right? So we're gonna set interest rates and we're gonna make it very clear to everyone, people in the market, uh, people on the street, both main and involved, that when we set interest rates, here's a very clear diagram that leads from inflation and unemployment and the things that the Fed cares about to that final value of the federal funds rate. That's one way of interpreting what we mean by data dependence. That version I really like. And then there's another version, which is uh which I also kind of like, and Warsh has mentioned this, is they're also looking at different data sources. And so to expand their worldview on what counts as a good inflation metric or what counts as a good employment metric. Here they're going to run into some challenges. He's shown a willingness to look at more private sources of data, which is great because private sources are less prone to error and much faster than government statistics. But the problem is when the government publishes a zero price option, it's very difficult for a private company to compete at that margin. So there's very little incentive for a private company to come out there and then start publishing really good data on GDP or really good data on unemployment, uh, just because there's no profit incentive in the market for them. It's hard for a private company essentially to compete against a free public option. So on that second metric, I think I'm not sure that Warshh will get a lot of bang for his buck. Robbie ChrismanAnything else you're keeping your eye on as we move through the third quarter here? Maybe things you feel like people should be looking at but aren't, stuff, stuff that's that's kind of piquing your interest. Jay CatoWell, I'm a Fed expert, so that's that's usually where my focus goes. And so there's there's tons to pay attention to over there. Uh, particularly how all of these task force reports are going to be implemented. Uh, in his in his you know, hearing uh Walsh mentioned that he's not a very patient man, so he expects this to start happening within six months. I I'm not sure that's a that's a that's an altogether feasible timeline. Uh, but but I really do want to look at what's happening with the balance sheet in the near term because they said there's not going to be any immediate changes. That's one thing. And then I also, I mean, when it comes to rates, I kind of want to see how this weight and see approach really goes because I'm not sure that the Fed has that much leeway. The Fed has waited and sort of seen through most of the inflation of the year. It hasn't changed rates at all. I doubt that that's something that can continue to happen, especially with the hawkish tilt. So if we see the war continue and things like that, you'll you'll you'll start to see that bleed into Fed decision making as well. On other fronts, there's a lot of focus on AI. And of course, people in the industry always want to ask, hey, what do you think about AI productivity? How do those things affect the Fed? When it comes to the wide-scale adoption of technology, I'm always much more hesitant than people than people around me seem to think it's going to take. I remember when I was in San Francisco in 2015, everyone thought we'd have self-driving cars in a year. So I think the adoption of the technology will be much slower than people actually expect it to be. And I think there's many more pressing concerns, particularly with tariffs and trade policy and war. I think those things are things everyone's paying attention to. It's one of the easy parts of me being a macroeconomist is that I don't have to pick and choose niche things. I can just kind of look at the economy as a whole rather than try to nitpick. Robbie ChrismanWell, don't worry. The the mortgage industry is used to slow adoption of technology. So you're preaching just to require. Where do you feel like we are in terms of an economic cycle? And I won't let you say wait and see. The Fed is the one to wait and see, wait and see your whole life, and then you're dead. But thoughts on where we are. I mean, obviously, there hasn't necessarily been a normal for a while. If I think about at least the housing market, and obviously the mortgage industry is very sick with all, there was a since the the great financial crisis in 2008, which is almost 20 years ago, the only normal period was arguably 2015 to 2018, maybe 2016, 2019, normal and air quotes. That's three years out of 20 that we've had normalcy. So I maybe there is no normal, but in terms of the overall economy, where do you feel like we are in terms of the cycle? Jay CatoYeah, I think most indicators are fairly strong. Uh the problem is that the indicators themselves are in very weird places. So just take the labor market, for instance. Obviously, people associate these cycles with unemployment and things like that. If you looked at the unemployment rate, it hasn't, it's basically been stationary for two years here and barely budged. It's completely at trend. So by that's by that standard, you could make the claim that, hey, things are absolutely normal right now. But the underlying labor, labor numbers, if you actually look at why unemployment is steady, is that we've had very little job growth in the US in the past year. It's just that the unemployment rate hasn't been affected because there are also much fewer people looking for jobs. So kind of the job, the reduction in job growth has been matched with the reduction in job demand. Uh so whether that's a healthy labor market or not, is really up in the air. We kind of haven't seen things like this happen in a very long time. So people like to freak out, but I'm a huge believer in the American system and the American economy and its resilience, and you can kind of see that. The reason why we haven't had any normal period is because the last 15 years haven't been that normal. We've had wide-scale political changes in terms of election results and in terms of kind of where the country is going with relation to its economic beliefs. Uh, you've had wide-scale changes in the way we implement policy. The Fed is completely different now than it was pre-2008, as I as I discussed. So, by all of those metrics, we're in a very good place. Yes, inflation is a little a little elevated, uh, but I believe in the resilience of private markets, and that's why you've seen the stock market keep on going on. And so by all those metrics, yes, we're we're doing okay. You can always look at specific sectors, of course. Some things are more expensive than others. People like to focus on housing and healthcare and those things. And in most of those cases, the answer is to get the government out of those places more and allow free markets to flourish. But for the most part, looking at the US from a macroeconomy perspective, yes, this blips here and there, but we're in a good place. Robbie ChrismanJay, ton of great insights, man. I really appreciate you making the time for listeners that they didn't notice. I made you sit in the Zoom waiting room way longer than anyone could humanly be expected to. But I'm very glad you waited. Very glad we did this, and uh hopefully we'll talk again soon. Jay CatoLikewise, thank you so much, Robbie. Appreciate it. Robbie ChrismanToday's economic calendar includes the Q2 Employment Cost Index, July Chicago PMI, and final July University of Michigan consumer sentiment. At a high level, inflation is easing only gradually, consumer spending remains resilient, but increasingly constrained by weak real income growth, and the economy is still expanding at a moderate pace thanks largely to business investment. We began the last day of July with agency MBS prices, little change from Thursday's close, the two-year yielding 4.26, and the ten-year yielding 4.68 after closing yesterday at 4.66%. Let's wrap up with a joke and some housekeeping. It was a sweltering August day when the Cohen brothers entered the posh dearborn Michigan offices of Henry Ford, an infamous anti-Semite, the car maker. Mr. Ford announced Norman Cohen, the Eldest of three. We have a remarkable invention that will revolutionize the automobile just kidding, I'm not gonna do that voice. We have a remarkable invention that will revolutionize the automobile industry. Ford looked skeptical, but their threat to offer it to the competition kept his interest piqued. We would like to demonstrate it to you in person, they said. After a little cajoling, they brought Mr. Ford outside and asked him to enter a black automobile parked in front of the building. Hyman Cohen, the middle brother, opened the door of the car. Please step inside, Mr. Ford. What? shouted the tycoon. Are you crazy? It must be a hundred degrees in that car. It is, smiled the youngest brother Max. But sit down, Mr. Ford, and push the white button. Intrigued, Ford pushed the button. All of a sudden, a whoosh of freezing air started blowing from vents all around the car. And within seconds, the automobile was not only comfortable, but it was also quite cool. This is amazing, exclaimed Ford. How much do you want for the patent? One of the brothers spoke up. The price is one million dollars. And there's something else. The name, Cohen Brothers Air Conditioning, must be stamped right next to the Ford logo. Money's no problem, retorted Ford, but there's no way I'll have a Jewish name next to my logo on my cars. They haggled back and forth for a while and they finally settled. Five million dollars, but the Cohen's name would be left off. The first names of the Cohen Brothers, however, would be forever emblazoned upon the console of every Ford air conditioning system. And that is why even today, when you enter a Ford vehicle, you will see those three names clearly printed on the air conditioning control panel. Norm, High, and Max. Thanks again to Experian Verify for sponsoring this week's podcasts. Experian Verify provides mortgage lenders with automated income, employment, identity, and asset verification solutions that help accelerate underwriting while reducing fraud risk and manual documentation.