Navigating Economic Policy Conflicts: The Fed & the White House | April 21, 2025

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Welcome to Optimal Insights, your weekly source for real-time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize your profitability this week.

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Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm Jeff McCarty, Vice President of Product Management at Optimal Blue. As you may notice, Jim Glennon's not here today, but joining me are Kevin Foley, Director of Product Management, and Alex Hebner, our resident economic guru from the desk. Let's dive into today's episode. All right. Welcome Alex and Kevin. See if we can have a great show.

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Even without Jim, think we got, we got a lot of interesting things to talk about today. As always, we'll see where we're at with the market. We'll try to move a little bit away from tariff talks today, but of course it's, it's unavoidable. We've, we've got to hit on some of that. I think the big news over the past several days is the Trump pal TIF, if you will, we'll call it a TIF for now. We'll get into some of the details of that. But overall it was kind of a stable week last week in terms of data and

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In terms of where the markets were, we saw the OB-MMI pretty stable in a pretty narrow range. So the conforming 30 year is 6.7, sort of bouncing around that 6.7, 6.8 range. Same story with the 10 year, really kind of 4.35 all week. So relatively flat there. Last week, the yield curve, looking at the 210 yield curve, that was flat, but it had kind of steepened.

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the week prior, as we saw a little bit of a run-up in rates. So that 210 yield curve is about as steep as we've seen it in a while, a good while, so over 50 basis points. So we can hit on that a little bit as well. Last thing is locked volume. As we're looking at locked volume across all of our clients, we've seen that hang in there in spite of the jump in rates. think it's surprisingly...

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strong lock volume relative to where we are with rates. So maybe we start with that and talking about what we're seeing in terms of lock volume. Anything particularly interesting you want to comment on there? Yeah, I think I'll speak, you know, I don't want to speak for the entirety of the Denver desk, but I think anecdotally what I could speak to is in line with the broad numbers you're seeing for the lock volume in our system. Jeff, you know, last week, lot of my clients saw steady volume throughout the week, despite, you know, rates having rashed back up on the back of this Tuesday.

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spread that you're talking about here, the long end of the curve, 10 year plus, all seeing higher rates, bit of, I don't want call it dumping, lot of selling activity in the treasury's market right now. That being said, I would say mortgages have held up pretty well. I think we're definitely seeing a bit of seasonality in effect. This is prime spring buying season to get yourself in a new home in the early summer. And I mean, if you look back over the course of a year on the OBM,

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MMI, we're a quarter to three eighths better than we were this time last year. So I think a lot of people are locking and they can say, hey, I'm getting a better deal than I would have this time last year. And I think there's a lot less convincing that needs to be done in regards to rates just because people become accustomed to this rate environment. think those are some good points. also noticed Logan Motoshami had posted an article in HousingWire talking about new home sale data. The weekly data that they track is showing

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positive year over year growth. Obviously, that's a good thing and I think speaks to Alex, what you're saying, which is we're sort of here. Rates have been elevated. Maybe there was a contingent out there somewhere who was expecting that home prices would drop dramatically because of the lack of demand. That really hasn't happened over the past couple of years. In fact, some corners of the country are still very strong and significantly lower inventory than pre-pandemic.

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Overall, I do think it's reflective of people are just getting used to the market the way that it is and just making the most important decision of their lives, regardless of what things are going on out there. I think the last point that I could make, in regards to what we're talking about here in the mortgage market, is that we have seen some of the hottest markets cool a little bit. I know that the Austin taxes of the world, the Denver, Colorado, they've all seen increased time on the market for homes and they've also seen

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cuts in housing prices. I think, you know, a combined factor of, you know, pricing is a little bit better in some of the hottest spots in the country. Uh, in addition to, again, if you're just looking at, if you felt like you might've given up your opportunity last, last spring, uh, you could be getting into a better rate right now. Yeah, I think that's a good point. All right. Well, let's get into our, uh, the, never ending topic. Let's talk about where we are at the state of tariffs right now over the past week. What kind of talk there's been over the weekend, anything interesting there? Yeah.

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You know, I'll keep it pretty short because I think this news update on regarding tariffs is actually pretty short this time around. We really didn't see much development in the tariff realm last week. Right now, just as a reminder, there's a 10 % blanket tariff, you know, on pretty much every country in the world. There's 25 % tariffs on sector specific carbouts that the Trump administration has already built out, specifically in metals, I believe in lumber and then in auto parts. They've made announcements that there's going to be further sector specific.

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carve outs for tariffs to try and emphasize trade deals on certain products before others. And then we have the 145 % tariff on China. I don't think that one's really a shocker to anyone. I've seen calls of people being like, why aren't we just embargoing them at this point? Because that number is already essentially an embargo tariff. think there's a whole conversation that could be had there, but that's kind of the lay of the land where tariffs are at. I think people were expecting over the weekend, maybe some sort of announcement. Equities markets this morning are selling off.

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I do think they were expecting some sort of progress, maybe not regarding China, but regarding an ally or some sort of announcement that could have came out regarding some sort of deal. They didn't get that. Yeah. I heard some news potentially about Japan on Sunday. But one point of context that I stumbled upon, I think this weekend that I found interesting was in the past, trade deals have taken on average 18 months to negotiate between countries. So the fact that

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They're looking to do this in 90 days. You know, obviously an accelerated timeframe, but not necessarily something that we would expect news on week to week necessarily at this point. This is probably something that's going to shake out of the next few months. Yep. Yeah. I like your point on it essentially becomes an embargo's, uh, listening to an interview over the weekend with a toy maker, uh, that that gets most of their parts from China and they, you know, just making the comment like at this point, what sense does it make me to try to cut costs in other areas when

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You know, this is all I'm focused on is, how can I reduce the impact of tariffs? So it completely changes their incentives for, for their focus to, um, you know, if they want to stay in business, they've got to focus completely on tariffs. Otherwise it does become essentially an embargo. So it's a super interesting dynamic, um, whether you're, you're making toys or, uh, semiconductors or, you know, transformers. Interesting dynamic there.

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Yep. That's probably the understatement of the year there, Jeff. Those numbers are extremely punitive. But for the time being, as of 11 a.m., Monday morning, no news is bad news for the market. We're selling off a little bit. I think what's really kind of on the tip of everyone's tongue right now is Powell and his little spat with the White House, the executive branch in general. This has kind of been, I'd say, the second most important factor kind of impacting the market.

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The US economy recently, Trump has come into the White House saying he wants lower rates. Some were predicting that these tariffs would lead through to lower rates. They initially did for about 48 hours. And then we saw rates kind of ratchet back up into this, whatever you want to call it, this higher rate environment, bond vigilantism environment. There's a lot of finger pointing on who's doing the selling of US treasuries. But Trump this morning tweeting that

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Powell needs to cut rates. He's a loser right now because he isn't cutting rates. And I think that the markets are taking quite a bit of a step back on those comments just because of kind of uncharted territory for the Federal Reserve. Yeah, I think it's pretty clear that the markets definitely would prefer Fed independence. Going back to Trump's comments versus Powell's comments, I just think it's too funny. You got to compare the rhetoric, right? So, Powell firing shots.

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Uh, he said that what the, the white houses views are still evolving and their effects on the economy remain highly uncertain. So was a super formal comment. And then Trump comes in calling Powell a loser. So I just had to comment on that. You got to laugh at the dynamics there. And it's, it's interesting also in the whole context of, you know, the fed being an independent agency, because that's something that's not.

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necessarily been tested legally to the fullest extent. think everyone's afraid of touching the hot stove. We saw that with the administration stepping back from the abyss with the craziness in the bond market during when the tariffs were incredibly high. I think there's risk. I've heard it described or I've seen it reported as the quote, unquote, moron premium, which don't at me, Jeff, because I didn't coin the term, but there's this

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concept of policymakers are not necessarily acting in a way the markets perceive as rationally, or if there is a potential erosion of independence of agencies that are responsible for economic policy like the Fed, then you could see that be reflective of an increase in the term premium of US Treasuries. One case that I've been following that I think is pretty interesting is

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So right now, the Supreme Court is currently considering a case about whether the administration has lawfully fired two officials from independent federal labor boards. So the reason why this is important is because these labor boards are structured similarly to the Fed in which there is supposed to be a level of independence. Does the executive branch really have authority to do that?

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they're reviewing that case. So there hasn't been a ruling on that. But the outcome of that case could set a precedent affecting whether the president has the ability to dismiss leaders of other independent agencies, including the Federal Reserve. And now it's important to note also the administration is arguing in that case that they don't think that this precedent would apply for them firing someone from the Federal Reserve. But we're sort of still in this uncharted or untested legal territory around

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whether or not there is really true independence of the Federal Reserve or not. I would agree. I would absolutely say that we're in uncharted waters right now. I think that the Federal Reserve and the government in general, regardless of branch of the government, have operated throughout the history of the Federal Reserve and more in lockstep. They were all on the same page on what kind of economic order they were promoting. And I think this is the first time we've seen in the history of the Federal Reserve that in this case, the executive branch's ideas for the world economic order are

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not in line with how the, the federal reserve sees it. The federal reserve, you know, maybe more taking the, maybe standing in for, for how markets are seeing things and markets are still operating by the old playbook, the new playbook. I don't want to say there is a new playbook in effect quite yet, but, uh, I think they're trying to write the rules for that playbook right now. So yeah, I absolutely agree. think we're in uncharted waters. It's definitely hard to say where, where this will go from here. Uh, Jerome Powell on Wednesday was speaking at the Chicago economic forum.

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And he couched all of his statements very lawyerly. They asked him point blank. said, know, if Trump fires you, if he hands you a ticket, says you're fired, what would you do? And he just said, as the law stated, he cannot do that. And he kind of declined to comment further on the matter. This whole story does come back to what we've been talking about for a couple of months. And one of the the theses that Jim has been clinging on to, which is just that,

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One of Trump's main goals overall for the economy is to lower rates, sometimes by any means necessary. think Trump views that as probably something that would be very popular. Obviously, it would be certainly very popular in our industry. think all of this is, well, I mean, he is explicitly saying that, so I don't have to think that Trump is telling us that every day that he wants rates lower. This just reinforces all that.

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I think it's important to make the point too that we've got the upcoming Fed meeting on May 7th, right? That's sort of the next test for whether rates will be cut. think the market has priced in like a third of a chance or so less, less than I checked. Less, something like 10%. Right now, June is the first. Yeah, yeah. I did see like more than 50 % there. But I think that the point that I was going to make is

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When the Fed cuts rates, we all need to remember that we're talking about short-term rates. We're not talking about how mortgages are priced. They operate similarly in some ways, but very independently in other ways. There is a risk where if we cut short-term rates too quickly, that the impact that that ends up having is it juices up or increases long-term rates. So it stokes

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inflationary pressures if we cut short-term rates too quickly because short-term rates, the goal of raising those is to bring down inflationary pressures. If we don't have appropriately set short-term rates given the level of inflation that's out there, then that has the potential to increase inflationary expectations which ultimately increases longer-term rates which factor in the mortgage rates. I totally understand why folks in the mortgage industry would be cheering for a Fed rate cut.

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in May, but I think it's important that you're really what we want them to do is to make the best possible decision based on the data. That's, what we're looking for. Yeah. Well said. And tie that back to the beginning. You know, that's what, that's why I always look at that two 10 spread, right? We, we, we look closely at the yield curve to look at those exact expectations. So those are great explanation again of why, um, that, yield curve is so interesting to us as we're.

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thinking about what is the Fed doing with short-term rates and how will that affect long-term rates, inflation expectations, and again, specifically for our industry, ultimately mortgage rates, 30-year rates in particular. Great explanation there, Kevin. Anything else on Powell that we want to hit on? I was just going to say, one thing that I thought was kind of interesting is there's always historical parallels, I think, to be drawn around where we are now versus where

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re was a rate cut was back in: 2007

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they were back in December of: 2007

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: 2025

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thumbs down in terms of cutting short-term rates. Wage growth was about similar, 4.3 currently versus 4.1, meaning that again, wage growth is another measure of inflationary pressures. Then the 10-year treasury yield is also higher today than it was back then, which is also a measure of inflation expectations in the future. All of those indicators would also support the idea that

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It's not the right time for the Fed to cut now. Obviously, that's just a sampling of things. I thought that was interesting, particularly because again, there's always historical parallels that can be drawn that help us better understand how decision-making could play out in the current environment versus the last time that happened. Yeah. I guess the counterargument is the Fed

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to be too slow to react? Are they too slow to react? Are some of these things starting to weaken enough? Are they looking ahead enough and just not relying on old data? The argument that people thought the Fed was too slow to raise interest rates, which is why we got into this inflationary environment to begin with. But I would agree overall. think in aggregate, the data says the Fed should be pretty close to where they are. It's hard to find.

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too strong of an argument that they should be doing an emergency lowering rate, certainly. Yeah. No, think that's a good call. These are all lagging indicators. They're not forward-looking projections, really, maybe with the exception of the treasury, sort of. But yeah, this is all looking backwards as opposed to looking forward. So not necessarily a full analysis of what everything that they're going to be looking at. But yeah, I thought it was interesting to put that together. Absolutely.

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Um, and I couldn't say it better than the pal himself, but I would, I would recommend you go listen to his, speech from last Wednesday. You can find it on YouTube or the federal reserves website. Um, you know, he, he's talking about, as Jeff said, he's talking about the same things we're talking about on the podcast here. Inflation, unemployment, how to balance those two notably hawkish during this last interview session. He noted that inflation is on his radar and that the federal reserve will respond to if they're faced with both inflation and unemployment risks.

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They will address the one that is the most out of line first. Those were his words, which the market interpret is very hawkish considering that there's currently three to four rate cuts expected by the market right now. So we definitely have a lot of differences in opinion between the decision makers and the market itself. that all leads into, I think the hardest part about this market right now, whether it's the mortgage industry in particular, the broader market is just the level of uncertainty between

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the decision makers, all the data, all the tariff talk, the uncertainty and the volatility. What we did had slightly less volatile week last week. I don't think anybody feels like it was lacking volatility in a lot of ways. So this uncertainty is whether it's home builders trying to figure out the cost of labor is now versus what it'll be in three months across the market, whether it's borrowers figuring out where rates will be, this volatility is hammering.

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I kind of every parts of them, every part of the market right now. I think the short of it is business decision makers hate uncertainty and they would, they will choose to pause making decisions rather than proceed with unknowns. Um, and that goes, so until uncertainty abates, expect the current trajectory to, continue. Yeah. But, did you guys know that there's actually a lot of people on LinkedIn who know exactly what Powell should do in Twitter as well.

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I don't know if he's consulting the resident experts, maybe take a look. The Twitterification of LinkedIn is something I think about a lot lately. I'm not sure there's much of a difference between Twitter and LinkedIn in some days. Fair point. All right. Well, let's start looking ahead. What is some of the hard data we have coming out this week, Alex? It's relatively quiet.

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week, this week, Jeff, it's, you know, we have some housing specific numbers. have new home sales on Wednesday and existing home sales on Thursday. Fed Beige Book comes out Wednesday as well. That one's kind of a recap of the last Federal Reserve meeting where again, we didn't see any rate cut activity there, but it could sometimes that Beige Book gives us some insights that were, you know, overlooked by the market or not picked up on by the market during the last Federal Reserve meeting.

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Then I think the number one thing to watch out for this week is on Friday, there's a consumer sentiment release for, think, for Q1. That one's really just going to, I think that was going to have the greatest impact, just because everyone right now, outside of unemployment and inflation, is looking at how tapped out is the US consumer? How much are they frontloading these tariffs? they buying, buying, buying now with expectations to cut back on spending in Q2 here? Look to Friday for the biggest move from a data release perspective this week.

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That's a great way to frame that. It'll be interesting. Well, that was a great episode. think we did pretty good without Jim. So thank you, Alex. Thank you, Kevin. We still miss you, Jim. Next week will be a really great episode. We have Kevin Jackson from Wells Fargo that'll be on. He's been on some of our webinars before and he's got some really great takes on the state of the market. So we'll be interested to hear on what he says next week. So looking forward to that. That's it for today. Join us next week for another episode of Optimal Insights.

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