Vice president breaks down Fed action in assuaging concerns

Days before the central bank took action, Cohn correctly predicted the body would raise rates by 0.05% as others had expected. “I want to start with the overall reminder that when the Fed raises rates, it raises the Fed funds rate,” she began. “It doesn’t have necessarily a direct correlation to the bond market. It’s the bond market that drives mortgages. Obviously, the Fed funds drive the prime rate and that impacts equity loans.”

She noted how the stock market rallied after Federal Reserve chair Jerome H. Powell unveiled the economic plan to mitigate inflation, positing this response as indicator of its soundness. But other economic factors have since aligned to spook the market as inflation digs in its heels. “When the Fed raised rates by the expected half percent, the markets took it in stride,” she said. “When Powell, during his comments and questions, made the remark he did not expect they would have to go to a three-quarter hike in June and they would probably have two half point hikes in June and July, the market actually rallied and bond yields came down.

“But then the next day, there were some economic data points that came out that spoke to the fact that labor costs were still accelerating at a crazy pace – more inflation reminders – the bond market forgot about the Fed and paid attention to inflation and that, coupled with the fact the Fed is raising rates, meant bond yields climbed to rates we haven’t seen since 2018.”

It is such a confluence of market forces rather than one set of data in isolation that is fueling volatility, she suggested. But bottom line: There is no reason to panic, and the housing market will emerge OK: “Higher rates, especially coupled with a [potential] recession, will definitely slow certain segments of the real estate market,” she said. “But the broader real estate market will likely not slow down and prices will not drop, as there is still more demand than there is supply.”