In this episode, the Optimal Insights team analyzes the lingering effects of the recent government shutdown on economic data and market sentiment. With limited new data available, the conversation centers on the upcoming FOMC meeting, the evolving composition of the Federal Reserve, and the implications for mortgage rates and market confidence.

Jim Glennon, Alex Hebner, and James Cahill discuss the increasing dissent within the Fed, the impact on rate expectations, and the potential for significant changes in 2026 as new appointments are made. They also touch on the influence of private payrolls and PCE data, the uncertainty in long-term rates, and the anticipated nomination of Kevin Hassett as the next Fed chair.

Key Points:

• Government shutdown has delayed key economic data, increasing market uncertainty.
• Upcoming FOMC meeting and rate decision are pivotal for the mortgage industry.
• Rising dissent within the Fed could lead to greater volatility in rate expectations.
• Mortgage rates remain stubbornly above 6%, with spreads tightening.

Optimal Insights Team:

• Jim Glennon, Vice President of Hedging and Trading Client Services
• Alex Hebner, Hedge Account Manager, Optimal Blue
• James Cahill, MSF/MSR Account Manager

Production Team:

• Executive Producer: Sara Holtz
• Producer: Matt Gilhooly

Commentary included in the podcast shall not be construed as, nor is Optimal Blue providing, any legal, trading, hedging, or financial advice.

Mentioned in this episode:

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There's more dissenters that do not want to cut rates, which goes against what the administration would like against what I think a lot of folks in the mortgage industry would like, but starting to see more descent, which I don't know, kind of, do you think that indirectly then sort of keeps rates, market rates higher

Welcome to Optimal Insights. I'm your host, Jim Glennon, Vice President of Hedging and Trading Client Services at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hi, welcome everybody. It's December. We're in the last month of the year the interest of keeping you informed. We're going to have a little market update today, even though there's not a ton going on.

in the social media, not a ton of economic data coming out yet, kind of in that hangover from the government shutdown still. But we'll sit down with Alex and James, talk a little bit about some numbers we will see this week, as well as the upcoming FOMC meeting and rate decision should be coming up next week, December the 10th. We'll also just talk in general, some thoughts around just possible dissension in the ranks of the Fed as we look towards a probably very different looking Fed.

You know, stubbornly don't want to get below 6%. We're at 6.14 now. So we have marched a little bit lower as we've gone through the first holiday and the 10 year as well, 4.09. So that the spread is continuing to tighten a little bit, but also the 10 years cooperating somewhat. And volume hasn't really slowed into the holidays as we typically see it, which is, that's a good sign we think. So let's go check in with Alex and James and see what they have to say about some of these things.

All right. As promised everyone, we've got Alex and James with us today. Welcome gentlemen. Thanks for being here. just talk a little market, right? We've got through the holiday. We got through the market shutdown. Now we're gearing up for the end of the year, which tends to be, I don't know, maybe a little bit slow in terms of lock volume in our industry, but certainly.

can go out, what do they say? You can go out like a lion or a lamb, right? In terms of the equities markets, and certainly we're a little bit more concerned with bond markets, but there's always this debate on what's December going to look like, and are people getting out of the market or getting back in? But again, flipping back to interest rates, right? We have a couple of things coming up that I think will be pretty important for us. And one big one that we want to get to here,

in a little bit is the Fed decision coming up next week. But what do we have in the way of data like here just over this coming week? What should we be paying attention to?

keeping my eye on the the Wednesday private payrolls and we are gonna get PC data. That's that's mighty delayed on Friday look into the private payrolls this time around on Wednesday just because we're not getting the ⁓ Non-farm payrolls for the month. So gonna have to lean on that the next best thing being those ADP payrolls So so we'll see how the employment picture is looking. This is kind of the one of the first

post-government shutdown readings we're gonna get. So it's gonna be really interesting to see what we can parse out of that data. then just on the inflation front, just looking at PCE numbers on Friday, ⁓ those are gonna be kind of the two big ones. Other than that, I mean, those hit our two metrics that we're always looking at on unemployment and the balance with inflation. So those are the two.

Notably on Friday first Friday of the month there will not be a jobs port this time Due to the shutdown over the last month. They've canceled the October jobs port. So you're not going to see those numbers So as always a little bit more fog in the data right now

Yeah, yeah, we're definitely still kind of at the tail end of this drought of data we've been in for six to eight weeks or so now. hopefully beginning next week, we'll start to see that that pick up as we see that the delayed numbers begin to come out for, for November.

Right.

Yeah, I've seen some debate online, even some folks suggesting that the Fed delay their meeting till after the non-farm number. Because we got the September number a couple of weeks ago and it was sort of inconsequential, right? This is the one that everyone's been waiting for. Is this December number that's going to tell us what jobs look like in November? But it's just a week after the Fed. So all the Fed has, like you said, they've got this private payrolls from ADP, they've got PCE, they got a little bit of was done for the sake of the...

Social security benefits. So just an interesting time, I think going into the end of the year and there's been like more and more articles written, right? We talked about this a couple of weeks ago where six months ago you would have thought the Fed was about to be kind of taken over by the White House. There was rhetoric around that. was, you know, you had the Lisa Cook drama, then you had Myron coming in and there has been some changes. There's certainly been.

a lot more descent in the ranks, but lately that descent has kind of gone the opposite direction, right? There's more dissenters that do not want to cut rates, which goes against what the administration would like against what I think a lot of folks in the mortgage industry would like, but starting to see more descent, which I don't know, kind of, do you think that indirectly then sort of keeps rates, market rates higher because there was this expectation for the longest time that if rates move, they're going to go down.

If the Fed moves rates, the rates are going to go down. But now there's this debate that's kind of putting the brakes on that. Maybe not rate hikes in the near future, but it really questions the 12 to 18 month outlook. What do you think the effect is of just this indecisive Fed that's not really following each other, not following the consensus?

Yeah, I do want to note that we've only had one official dissent for keeping rights where they're at out of a meeting. That was Kansas City Fed governor from the last meeting. then we've had others imply or outright say just not in an official voting capacity they see the argumentation that they're looking at it. So I think there were two or three others that said that they could be convinced in that direction.

Mm-hmm. True.

But it's been, know, we're coming up, we're at nine days till the next meeting. So it's been a while since the last meeting and we've only had that one sharp descent. We've had, at the same time, we've had two or three others who are, you know, falling into Myron's camp and saying, you know, we'd need to be more aggressive with our cuts. So I'm with you that I think that there's probably for the first time and maybe call it this decade, know, a large degree of descent from, I don't want to call it the norm, but everyone seemed to be voting in lockstep for the past five years.

likely, ⁓ due to, ⁓ extraordinary times. yeah, Palace Fed has been, extremely, ⁓ voting, down the line. ⁓ Jim, you were pointing out before the, just began recording, but this is actually kind of more of a historical anomaly. during like Bernanke and Yellen's tenure, you saw not, as high as we might be approaching now, but we were seeing greater number of voices dissenting on, on any given opinion, whether to the upside or the downside.

I think he said it was like 20 % or so under Bernanke and then 30, 40 % under Yellen. right now here in the tail end of Powell's term, we're beginning to see that approach probably like a 50%, you know, like a five, seven vote or something like that. Again, we haven't officially seen a five, seven vote, but we have the voices potentially leaning that way.

Yeah.

Yeah. And it was actually the, so that was the other way around, I think. But so, yeah, I was reading this article that basically said that under Bernanke and Yellen, there were more often than not, there was some dissent, but it was typically like one vote going in against the consensus. what we're seeing now that could be unusual is something closer to 50-50, possibly. Like you said, it hasn't happened yet, but there's this, this growing

kind of rhetoric in the media and these press conferences and you can see it with the CME, right? It's 50-50. Whether we're going to see a next month, I can't remember the last, or next week, I can't remember the last time we saw that kind of split. Right? So that has to be, it's making it difficult for the market makers to decide which way your rates are going. So there has to be, it has to have some effect just on overall, especially long-term rates when no one really knows what the path looks like for the next 12 to 18 months versus.

when you have more of a moving lockstep, like you said, where everybody's kind of, everyone has similar opinions, there's no strong opinion otherwise. So I think historically, even in that situation, if there was no strong opinion to dissent, a lot of the Fed voters would just vote with the majority. They would vote with the consensus. would come, they would appear to be unified, which gave even more confidence to the markets that rates were going in the direction that everyone thinks they're going, right?

But now we have this split potentially. have the rhetoric is starting to cause a split where the money is kind of on both sides of the trade.

Yeah, absolutely. Yeah. CME has swung pretty wildly in the last two, three weeks. We saw it go from 90 % chance for a cut down to a 30 % chance of a cut. And now it's, back up around 80, 85%. So it's, it's been quite varied in this was all driven by comments made by, by those governors in their non-official voting capacity. so it's definitely interesting. And I could, I could even see maybe like a three way split, you know, beginning to emerge, you know, Kansas city governor was saying that, that we've cut too aggressively.

yeah, maybe if we saw like a three, four, five vote split or something emerged, would add an additional layer of drama. ⁓ Yeah, but that's total speculation.

Right.

to add onto.

to add on to something we had talked about in the months previous is that really when the Fed is influencing rates, what they're influencing is the two year part of the curve, right? And what we're seeing in mortgage rates is built off of the two and the 10, that's spread there. So that 10 year is much more about long-term confidence, what the government is doing, are we gonna be able to pay back our bills, so on and so forth. And so the Fed is really influencing that two year arm and the more kind of dissent or confusion or just possibility of that two not going in the direction we thought,

like already it's going to peak up, right? Like we've been struggling to get under that 6 % number. Hey, even if the Fed kept coming or cutting, could we cut it more and more get underneath that 6 % has been a big question mark. And now as soon as you start looking at, hey, maybe this rate is not going to go down any further. It's going to push back up rather than steepening further down. So it's kind of what we've been seeing is that that two years not.

Right. We were so close. Yeah. We were at six and an eighth there for a bit, you know, and now we're taking up a little bit. And I think you're right. There's just that upward pressure and a lot of that has to do with uncertainty. You know, the spread is continuing to stay compressed and maybe compressing a little bit more of the spread between treasuries and, and mortgage back mortgages in general. But yeah, I don't think we're getting quite the cooperation that many had hoped for or even demanded from the fed doing their part.

behaving how we might have wanted. Yeah.

you know, in lowering mortgage rates.

Right now, the rumors around DC appear to be that it'll be Kevin Hassett. He's got pretty extensive campaign experience. He worked on W. Bush's campaign. He worked on McCain's and Mitt Romney's campaigns. And then he got brought in during Trump one, ran on the National Economic Council, did some work from the economic angle during the COVID era. And then he's also done some time at the American Enterprise Institute, which is a conservative leaning think tank.

definitely been around the block on the DC circuit ⁓ knows his way Trump was asked point blank on the Air Force One this past weekend if Hassett was going to be the nominee, he demurred and said, we're going to have an announcement about it. Stop asking. But right now that seems to be who it'll be. You know, just kind of this guy's, you know, resume, I kind of see him much very much so being in the Myron image. And I think that's kind of what they're going for. I think they want to they want to stock the Fed with with

people who think similarly to Myron and get the rate cuts that they've been asking for. So, you as we discussed here, they can at least get that two-year arm of the equation to behave.

Yeah, good call. Yeah. It feels like the fed will continue to start moving that way towards, I don't know, more of a, I don't know. Maybe we get a little bit of a dip in rates just on the news. If it becomes evident that has it is the nominee, or do you feel like we've already seen that just because the idea is that the administration wants lower rates. They're going to bring in somebody very dovish, very

Kind of low rate friendly or is Hasset a big enough deal that once that's announced, do we feel like rates will dip a little bit on that?

it gets locked in, could see it you know, dipping a little bit on that news, but I would think it's for the most part locked in at this point. think if, you know, if we're talking about, you know, how, because it's not just going to be Hasse, know, but Bostock's going to retire. We're going to see a number of appointments in the coming, not even year in the first half of next year. That should swing the composition pretty heavily in favor of the Meijer camp.

Mm-hmm.

Jim, as you were saying at the beginning of this, know, it felt, you know, four or five months ago, hey, the White House will just have control of the Fed by now. It hasn't happened by now, but it is just a certain thing. It will happen over the next coming months, just with the turnover there.

So with that, it should all kind of be priced in, right? We know this changing of the guard is coming. We know kind of the ideas that are going to be put into the Fed. So you would think that more rate cuts would be priced in. know, Mirren has been very loud about what he wanted.

and he's even backed off some. So it's hard to imagine Hassett coming in, just sitting down first day being like, I think we should cut two full points right now. Right? Like something completely wild with his resume and his kind of background. It seems you would be pretty reasonable here. I think it's all priced in. I don't imagine a huge cut maybe or a huge change, maybe day of little swing around, but I don't think the pressure is going to be enough.

Yeah.

All right, what else on this, gentlemen?

think we're safe to leave it there for today. Yeah. It's, ⁓ again, pretty, quiet out there. New cycle has been relatively slow on the economic front and we're really kind of, I don't want to speak without, ⁓ seeing the data first as we always say on the podcast. So, yeah, I think next week we'll, get a little bit more, revealed to us and we'll get to hype up the coming great decision.

Feeling good?

Good. Yeah, agreed. Certainly short on data. There's not been a ton of rhetoric in the social media to talk about on the podcast. So we'll leave you with that. Just contemplating what will happen with the rate decision next week and then the subsequent jobs report. And then we get right into the holidays and we'll see you on a couple more podcasts this year. We will likely have a little bit of a holiday special here coming up, think. Maybe we'll talk a little favorite Christmas movies like we did last year.

All right, Alex, James, always appreciate it. Thanks for your time. Thanks for the wisdom. Talk again next week.

Appreciate it. Thanks Jim.

Thanks guys.

All right. Another great episode. Thank you, James. Thank you, Alex. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.