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Powell 60 Minutes Appearance, Tame Inflation Report Keeps Yields in Check (for Now)

Fed Chair Powell’s appearance on 60 Minutes was well timed, 2 days before a highly watched CPI report. Markets continue to be hyper sensitive to signs of inflation. He struck a familiar theme during the interview as he laid out the conditions for the next rate increase. He reiterated that it will take more than a single monthly report of annual prices increasing above the Fed’s target of 2.0%. Powell gave a very specific answer: “(he would) like to see it on track to move moderately above 2% for some time. When we get that, that’s when we’ll raise rates.” He is well aware that the CPI and PCE figures for the upcoming months may skew above 2.0% due to the “base effect”. The annual increases are based on the 12 months since the depths of the pandemic shutdown last year.

Yesterday’s CPI report provided a test for markets. The annual CPI rose 2.6% aided by a 9.1% in the price of gasoline. However, the core CPI (which strips out the volatile food and energy components) rose only 1.6%. The 10 year T actually went down as inflation fears subsided and markets focused on J&J vaccine issues. The Fed’s preferred inflation gauge, PCE, will be released on April 30. The 10 year Focus on SFR Prices. The Fed’s nonstop purchases of Mortgage Backed Securities is designed to keep rates down for home buyers. But it may be contributing to runaway asset inflation in the single family home market. Home prices were up 11.2% according to the latest S&P Case Shiller index, the largest rise in 15 years (now that’s real inflation!). This is crowding out many potential buyers. In addition, these buyers have further competition. Homebuilders are increasingly renting out homes and selling to funds. DR Horton built 124 homes in suburban Houston and sold the entire subdivision to a fund. Now foreign capital is targeting homes for rent. Some of Europe’s major insurance companies and pension funds are forming multi-billion dollar ventures to purchase new homes in bulk. They are focusing on sun-belt “move to” markets as young families opt for more space and rent homes. Apartments rents: March data from the’s survey of apartment rents rose for the first time since the beginning of the pandemic, a 1.1% increase since last month as secondary locations thrive. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners