In this episode of Optimal Insights, Jim Glennon, Alex Hebner, and James Cahill take a step back to assess where the mortgage and capital markets stand as the industry heads into the fourth quarter of 2026.

The team discusses the Federal Reserve’s recent 25-basis-point rate hike and the significance of the unanimous vote behind the decision. They examine what the move signals about the Fed’s ongoing focus on inflation and what it could mean for future rate policy.

The conversation also explores current inflation trends, including the impact of rising energy prices, transportation costs, and broader economic conditions. The speakers review recent labor market data, expectations for upcoming PCE inflation readings, and how market participants are interpreting the Fed’s outlook.

The discussion shifts to housing and mortgage markets, where mortgage rates have moved above 7% and affordability challenges continue to weigh on borrowers. The team examines housing demand, builder incentives, home price trends, and the ongoing debate around supply and affordability.

Finally, the group reflects on some of the biggest market-moving developments of 2026, including geopolitical uncertainty, energy market disruptions, AI-driven investment activity, and growing debt levels. They discuss the conditions that could eventually lead to lower rates and what industry participants should watch as the year progresses.

Key Insights

• The Federal Reserve raised rates by 25 basis points and signaled continued focus on inflation.
• Rising energy costs remain a significant factor influencing inflation expectations and market sentiment.
• Mortgage rates moved above 7%, creating ongoing affordability challenges for homebuyers.
• The team examines housing demand, builder incentives, and home price dynamics.
• Geopolitical uncertainty, AI investment activity, and debt levels continue to influence long-term rates.

Chapters

• 00:00 – Introduction and Market Overview
• 02:30 – Fed Rate Hike and Inflation Outlook
• 08:25 – Employment Data and PCE Expectations
• 14:16 – Housing Market and Affordability Trends
• 18:40 – Major Market Drivers in 2026
• 22:00 – What Could Drive Rates Lower?
• 26:55 – Events and Data to Watch

Optimal Insights Team

• Jim Glennon, Senior Vice President, Hedging & Trading Operations
• Alex Hebner, Hedge Account Manager
• James Cahill, MSF/MSR Account Manager

Production Team

• Executive Producer: Sara Holtz
• Producers: Matt Gilhooly & Alex Kreuter

The views and opinions expressed in this podcast are solely those of the speakers and do not necessarily reflect the views or positions of Optimal Blue, LLC. The content included in this podcast shall not be construed as, nor is Optimal Blue providing, any legal, trading, hedging, or financial advice.

Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations 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.

Welcome everybody to this week's episode of Optimal Insights. Thanks for being here. we are deep into September already, already talking about third quarter, October. So have a few things to talk to you about today. Again, thanks for being here. Welcome, Alex. Welcome, James. Appreciate you being here as well. we'll talk market update here in a minute. And that's really all we're gonna we're gonna talk about today. So

you know, as always, we're here making sure that you know what to watch, whether you're an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary, we're gonna have a solid market update today. Sometimes I love doing this, just love having guests on, but sometimes it's it's it's nice to just throw away all the distractions and just level set, you know, where are we in this market cycle? And there's not just a lot to talk about.

in terms of what's happened over the past couple of weeks, but just what's happened since the beginning of the year. Like where are we economically, geopolitic politically and and where are we in terms of interest rates? That's what most of the listeners of this show are very keenly tuned into. So before we get into that, just let's talk rates. we unfortunately broke seven percent on the OBMMI this week, which is a just kind of a bummer statistic, but it it it was bound to happen with

Some of the gyrations going on in the bond markets and everything we've talked about here in terms of long-term rates. The 10-year has been vacillating between very low fives, very high fours. Again, that spread holding in about 2%. We're about 4.95 right now as we're recording this. So that would be in the OBMMI, probably around that 695, 697 handle. Seeing volume continue to suffer a bit, although somewhat resilient, considering this is the time of year we typically see a drop-off.

Super high inflation. We weren't talking about a three four handle. We were talking about seven, eight, nine. Obviously made a lot of progress since then, but still feeling the pressure of inflation. And the Fed is certainly acutely aware of that and seems to be focused on it. So I don't know, what did we learn last week, do you think, from that meeting, other than hey, rates are a quarter point higher now, at least at the overnight rate? What what else did we learn from Warsh's announcement last week?

Think that that he he set his course and the the ship is going to continue sailing in that direction. That that direction is is higher rates. made no indication that this was a one and done situation. And in in his, you know, 15 page press briefing, you know, he indicated that there's definitely still work to do. he, you know, brushed off any concerns about the labor market. In fact, he cited the labor market as a strength of the economy right now, is and something that you can point to in saying, look how resilient this figure has been over the

course

of the last you know decade, if not especially the post-camp pandemic five year period we've been in now.

so I I wouldn't expect you know any talk of of cutting rates anytime soon, you know. and and all this really led to the market digesting we're probably gonna see another hike by January at the latest.

Yeah, saw those stats from the CME. So we're kind of fifty fifty in October. So we're not fifty percent chance we get a hike, no chance of a cut. And then December, it's more like two to one, right? More likely we get that that hike. And to your point, yeah, by January we almost certainly have another hike. If everything stays the way it is. And as we know, that almost never happens, but you kinda have to follow the money right now and and go with what the what the trends are telling us. And and like you said, the the confidence

is that's kind of the way I see it. This confidence of this current Fed, I like it. I like how they all came out unanimous. Like that was big. The the PAL Fed was a little bit fragmented towards the end there, whether that was politically motivated or really was the data or whatever whatever you want to call it, right? But they came out unanimous, which I think is important for the market stability, the market confidence. And yeah, they basically said inflation's still higher than it needs to be. So draw your own conclusions from that market. So investors

understand that that probably means more hikes unless something happens to push inflation in the other direction or to tamp it down from where it is today, which is a little bit hot.

Jim, I think that unanimous vote was one of my really big takeaways from the FOMAC this time around, right? There was a lot of talk about.

How is this gonna is it gonna be split? Is it gonna go one way or the other? I I kind of had the pet theory that everyone was gonna vote for a hike and Walsh would vote to keep rates or cut rates, fully

knowing that it wouldn't win, but that would, you know, he'd be able to throw that out there that hey, I'm fighting for that.

proven wrong, I think it's good that it was sanctimonious, right? Everyone came in, they said, no, we have an issue, we have to take care of it, even if it's not out of control, it's time to step up and just finish this this.

war that we've been having with inflation, no one wants to see it come back. So I agree with you the like the confidence, but also just the the fact that it was a unified front saying we're going to tackle this sounds very good. It's very much what you want to hear out of a quasi-government institution.

Right. Yeah, I think and you s you said it a unified front. It very well could be that there were some dissenters in the room, but they all decided when we go out to vote publicly, we're gonna vote the same. So that I think that says a lot about the leadership in that room, probably not just Kevin Walsh's leadership, but everybody else saying we're gonna make a move and we all need to get behind it. 'Cause the market's gonna I think feel better about it if we all are on at least appear like we're on the same page versus infighting in a Fed, I think has caused instability in the past and and more

Market volatility. Yeah, it's it's still maybe shouldn't surprise me, but it does a little bit how far we've come in terms of the political rhetoric around the Fed. You know, President Trump did come out and say after the announcement last week that rates should be lower. He believes that that's better for the economy and obviously entitled to his opinion, but he did not personally attack Kevin Walsh or anybody on the the Fed board, which I thought was that surprised me a little bit. I thought it was going to go back to the

the old ways of Bill Poulty and and the president kind of getting after the individuals on the board, but they basically said we don't we don't agree that rates should be higher, but you the Feds made their decision, so, you know, moving forward. And and I think a lot of folks thought Kevin Walsh, given his history with the Trump family and the fact he was appointed by the president, that that he might be he might have been the the lone dissenter, as you said, James, that at least on paper that said, I don't think we should raise rates right now, but I'm gonna go with the rest of the board on this.

he's gone opposite of what the White House would prefer.

Fully agree. And that's like that leads into the confidence and the comfort of the market from the outside, right? Any of those questions about independence, it's qualmed for now.

Yeah. And if there's any lesson to be learned from the end of PAL's tenure, I think the the the proper takeaway, at least from the executive of the administration, was that let's let's not muddy the waters here, let's not, you know, play with with Fed independence. the market really

did not react well to that and at the end of the day they ended up getting

nothing out of that, you know, you that that pushing around kind of bullying. So hopefully that's

a lesson learned there. and again they can continue to express their their disagreement without leveling threats at the same time.

see, what else did we see last week? We got one unemployment number that once again was pretty impressive. So the the initial claims and continuing claims numbers are a good one to watch. It they don't get a ton of press be I think partially because they come out every week, partially because they really tend to gravitate into a very thin range between like a hundred and ninety thousand and two hundred and twenty thousand. But it's real numbers, right? It's not a survey like we get with the monthly jobless report.

It's people who are actually like losing a job, applying for benefits under unemployment. So that number again came in much lower than expected. I think what was the number? 190 ish and the expectation was about over two hundred, about two five. So still just really strong employment numbers one after another, again, kind of pouring cold water on the argument that rates should be lower.

What else did we get last week? We got the PCE.

PCE comes out on the 31st.

It is the preferred measurement of inflation for the Fed. It'll be yet another input into their models and to their own kind of voting dynamics. The market might make something out of it. Might I guess it depends on where it comes in, but I don't know. We generally expecting probably subdued three handle numbers there.

Yeah, I think it's like expected mid threes, three four, if I'm remembering correctly. But yeah, it should have a three handle attached to it. if anything, I would expect maybe a a surprise to the upside on this number just because all the inflation numbers that we got this month were relatively muted. they were all collected during the period of the memorandum of understanding. And then we've seen

it it's come back a little bit since then, but energy prices rallied, you know, near twenty percent after the expiration of that memorandum of understanding. And I think

that'll weigh pretty heavily on the inflation ratings that we see

For this PC reading as well as CPI PPI and the next P PCE,

So I think we're in for maybe a rough stretch of inflation readings here. We'll have to see how the Fed parses that and if they see it as as truly transitory and how much they they attach to the energy. And in my mind, a lot of what we've the continued inflation picture we've seen has been largely driven by energy prices.

But I do think it'll be especially noticeable on these on these coming

releases over the next four weeks.

Yeah.

I very much would second that, Alex. I think it's possible that we start seeing some slight upside surprises at first and it may grow out. I'm always looking at I check it every day, the average gas price in the United States, you know, looking at one month ago. So when we would have received the last PCE and when we would have been looking at a period during the memorandum of understanding when oil prices were lower, right? The average a month ago today was like four dollars and ten cents for regular. Sitting today it's about four fifty.

So there's a 40 cent difference

on every single car that's driving every single mile, but that's regular. Diesel, it's about a dollar. And so you're looking at a dollar on every single one of those 18-wheelers, on any single, you large boat, and eventually jet fuel is going to be even more expensive, more than a dollar going

up. So transporting goods is definitely growing. I think we will start to see inflation in those categories creep back up.

Agreed. We've really I mean I it doesn't get talked about a lot, but we're pushing the capacity of the United States and our ability to to generate energy. That was a big push when the war started when this price shock was sort of anticipated was drill, you know, get refine, pull as much out of the ground as possible and and and turn it into fuel and and that was when we expected a war that was going to be, you know, five to seven weeks long and now we're clearly

a lot, you know, we're s you know, six plus months deep into it. So at some point, yeah, th they're you're seeing it with, like you said, with diesel. And then jet fuel is another very high volume item that's that's likely to crack here soon, especially as the reserves are empty, as you also said earlier, where we we don't really have any any more of a a pressure valve to relieve any of this price stress.

Yeah, it's

Yeah.

it's a question of how long it can go on for. If you look at refinery utilizations, they're they're all floating right around a hundred percent, some are over a hundred percent,

which would indicate that they're skipping scheduled maintenance to continue running. and and yeah, there there's a lot of debate in the the petro community on on what is the real, you know, scraping the bottom of the barrel. There there's still north of 200 million barrels in our strategic repo petroleum reserve, but

there's there's a lot of debate on on when the the pumps will stop pumping because there's a a built-in bottom to the to those. So at the end of the day what we really want to see is is a resolution to to the conflict in the Middle East. So we can again just just get just get pumping, as you said, Jim.

Agreed.

All right. So that's PC. That's the thirtieth. Expecting low threes.

One quick note before we get back to the conversation. If you enjoy the kinds of discussions we have on the Optimal Insights podcast, you'll find even more of them at the Optimal Blue Summit 2027. What I love about the summit, it's not just the presentations, it's the opportunity to connect directly with lenders, capital markets leaders, product experts, economists, and peers who are all working through many of the same challenges and opportunities that face our industry. The conversations that happen between sessions or at dinner or at happy hours are just as valuable.

I think, as the ones that happen on stage. If you will be joining us in Scottsdale this February for the conference, my teammates and I are very much looking forward to seeing you. If you're not sure yet, learn more and register at summit.optimalblue dot com. I believe early bird pricing is available through october thirty first.

Otherwise, this week, really nothing to talk about in terms of numbers. There's a there's some housing numbers coming out, new home sales on Thursday. I wouldn't expect anything huge there. Other than, you know, I think that market's starting to slow down a bit. You you read more about how the builders are having to still continue paying for buy downs, which effectively impacts their margin.

They're trying to avoid lowering the actual sales price of homes because that's kind of then has an effect on what they can sell houses for in the future, right? But that there there is more downward pressure on prices at this point. So starting to see more cracks there. I I I still question the back and forth between supply and demand in housing, especially with where prices are this year. It feels like we're at a better spot in terms of price growth.

For the buyer, I think some sellers are starting to t twinge a little bit because they're they're seeing capital appreciation just completely slow down, maybe down to zero or even negative in some areas like Denver and some other places that got pretty hot. I just I've always had an issue with the math on the dearth of supply when people talk about how there's suddenly millions of homes that

Millions of homes less than we need. But I question where those people live right now. I think those people are renting and probably happy renting with where prices are and where the monthly payment is to buy a home. We're starting to see that start to start to claw back quite a bit with rates being sustained at a high where they are, and that just kind of unsustainable price growth that we saw for so long since like two thousand seventeen, eighteen.

Definitely, definitely.

Rates the the movement up in rates over the last three months has somewhere in there broken through the barrier. I know Jim, you guys were talking a lot at the the forum recently in Nashville that, you know, a lot of people labeling, you know, owning your own home is as is a is a luxury good right now.

and a large component of that is that that monthly bill. you know, moving from, you know, mid fives up to north of seven now is it's painful.

Right. Even with the bu builder funded buy downs, obviously there's still some hesitation paying a rate that high to buy a new home. And yes, the the it was Kevin Jackson kind of I had never thought about it this way, but he had basically said it's a luxury item. It's the kind of thing that that like buying an expensive whatever piece of jewelry or an expensive car, it's you at this point you're not just buying a home to live in it.

based on the difference in payment between buying and renting, you're kind of you're buying that luxury of owning that home versus spending you know, two thirds of that money just to have a place to to stay. So yeah, we'll see. So maybe the maybe I've talked myself into watching that new home sales number to see if there's any cracks forming in the, you know, on the builder side. Cause we can we can talk all we want about creating more supply, but if the demand's not there, the home builders are gonna home builders are going to back off.

All right. So again, not a ton coming up until we get to next week. We get PCE, we got the non-farm a week from Friday. But let's talk about how far we've come this year, right? We're almost in the fourth quarter of the year, which sounds just wacky to even say. But here we are. a ton has happened that we that was not expected, and a lot of it started right in l in the end of February, early March, right? We we had the

Very brief situation with Venezuela. And then seemingly r almost hours later, we we and Israel attack Iran and the world changes in terms of interest rates. We were at five point nine something. I think five point nine three is where we landed at the lowest on the OBMMI in late February, early March. And then the war starts and rates take off from there, right? We get

Almost instantly a half point higher. We're at six and a half, six and five eighths for four or five months. And then the lat just the last few weeks we we we take that additional three eighths leg up. We hit seven percent, as I mentioned earlier. slows volume down significantly.

I believe most thought the war would would have been over by call it summertime. And here we are entering fall. Energy shocks, all of that, right? I mean, what else have we seen change that had even a percentage of the impact that the war has had on on interest rates this year? Would you say the Fed? I mean, the new Fed, I think that that makes a difference, right? And the resolve of the new Fed and the realization that they're not, you know, paid off by the White House.

it it's difficult to put anything on par

Or even close to the importance of the war to the American economy this year, right? You could measure, slice it any way you want. Again, I'm gonna pull gas up, right? The price today is like $4.50 on average. You go back a calendar year ago, it's three dollars twenty. So it's you know more than a dollar over. And looking at diesel, it's three dollars worth of difference. That three dollar difference that

pushes the price of diesel up, that pushes the inflation all over the United States up. We were

coming in for a soft landing, right? It took a while, but we were actually kind of approaching that and we've really swung back the other way. Even as you said, hey, there's three weeks here, the last three weeks we kind of saw a little bit of relief, but that's the memorandum of understanding. That's a period of time where a little bit more oil got through. There was a little bit more certainty as to boats wouldn't be blowing up.

As soon as that's done, we see this come back. I I think the the Fed is, you know, if you wanted to point to something else that's been kind of important in this year, pushing things around, I think the Fed is probably the best second option. Warsh coming in is is definitely big news and what happens next, but the you know, in the in the history book, this is the year of the war of Iran, and you know, hopefully it stays at the year.

Yeah, and we'd probably be remiss if we didn't throw AI into that into this bucket. I think it certainly has an effect on the equity markets. The seemingly invincible S P five hundred, Mag Seven, all the the kind of drama around that. And un unless unless there you're Michael Burry or a few others who feel like that market's way over inflated, you're kind of all in on

the US equity markets for the foreseeable future. And that's helped probably helped a little bit with wealth in this country, also helped with confidence. but it's also pushed rates higher, right? Long term. There's been a ton of borrowing associated with with the AI players. There's also just the idea behind all of it is that it's going to improve productivity to staggering levels, which

feeds the equity market, but also could in the short term anyway feed interest rates and prices right into into overheating, even though very long term the the thought is that you have significant I think you have to call it deflation. The the price of goods drops dramatically over a long period of time. But for now it's it's a productivity play that's just keeping borrowing rates higher than anybody would like to see them.

So what would it take then if I'm you know, if I'm in the mortgage industry and I am and we all are, and many of us listening to this pod are are at least interested in where borrowing rates are going, what would it take for rates to go lower?

Finding a solution to the conflict, as we've talked about, I think, for quite a bit of this pod now, would be the number one thing. If you wanted to see rates

lower tomorrow, getting a long term peace plan in place would be the best place to start. but by no means do I think that would

be a a panacea of any means. like you said, Jim, you know, we're awash in in debt both from the AI boom, we're seeing we've talked about it quite a bit on this podcast as well, but you know, defense spending across the across the world is raising the cost of of debt. So it's all these competing interests that are that are pushing rates higher for for those those dollars that are to be lent out.

you know, you know, improve the energy picture. I think there's been, you know, some whispers around the US national debt. You know, it's not a pretty number we look at, you know, north of forty trillion dollars. I think, you know, some some sort of fiscal responsibility maybe would would drive rates a little bit lower, even if it's really

just in words, I think the bond market would react positively to to Congress taking a a critical lens to the to the national debt.

but but at the end of the day I think just just keeping you know, you know, markets seek out known quantities and this

conflict creates tremendous amounts of of unknowns and uncertainties. as I began my my spiel with, I think, you know, the number one thing you can do is a long term peace plan in place that says, you know, here's the winners, here's the losers, and here's how we're gonna move forward from this.

Mm-hmm.

Yeah, at some point, even if you know, I I don't see the current administration, or really any administration for that matter, taking a lo taking an L, you know, taking a loss in

a war if there was there's been discussion of a way to kind of off ramp from the conflict without taking a total loss, but still probably admitting some sort of defeat in t in terms of the the final terms of whatever agreement comes between us.

And Iran and the Israelis or whoever else is involved in the that sort of resolution, whether it's a a treaty or a something more verbal. But yeah, just taking that uncertainty off the table, opening up the strait or much less violence in the strait, I think certainly would be would push rates maybe not down to where they were. We may have missed that boat, so to speak, but maybe back into the mid to low sixes, which would

Hopefully spark some activity going into the end of the year, going into first quarter, depending on hopefully when that happens in the next 12 months. Yeah. Otherwise, there's really anybody's projections are gonna show, you know, mortgage rates between six and a half and seven for the next couple of years. Of course, we know it almost never plays out that way. Something will happen. This year, unfortunately, it was the war, so rates went up. Other times it'll be, who knows? It'll be a

You know, knock on wood, some sort of regional banking crisis situation, or there'll be an issue with credit. A lot of people worry about that right now with borrowers being already overextended and now continuing to see higher prices around fuel and food and all of it. Could that create some sort of stress in banking, which could cause the Fed to step in and so on? We've seen it happen before. Typically leads to lower rates, but to your point, there's so much pressure right now between sovereign debt, our own debt.

AI and the the willingness to grow out of this debt. That's currently the White House, I don't think, has any political will to lower the deficit. And it's very open and honest about that. And and previous administrations have have done the same. I think in our two-party system with term limits, you're typically not going to have

a lot of political will to to reduce deficits over time because by the time you any effects are seen, you're out of the you're out of the White House anyway. So it's doesn't suit your best interests or the interests of your people in your cabinet. So long way of saying that's probably not going to happen. We probably have to grow our way grow our way out of this thing. And that's the way the White House would

Hundred percent.

have it.

Yeah, no, I don't think there's any political will on on either side of the aisle to to rein in spending in DC. So, I'm in agreement there. It's it's either grow our way out or there are more painful options, which

you know, we don't have to go over today. But you know, inflation is amongst them.

Sure. austerity, like it's just not it's

kind of a b austerity is is yeah, political death, so that nothing like that's gonna happen.

Yep, yep.

Okay, what else, gentlemen? Did we miss anything?

I don't think so. I'm looking forward to next week and focusing inflation and non-farm number. So, you know, if you're listening to this on the the Tuesday this comes out the twenty second, when I'm speaking about that non farm number, I'm talking about October second, which is almost a full two weeks from your listening date, but some good data to come next week.

Absolutely.

I I would just throw out the

the UN. The UN is meeting in New York this week, so the administration will meet with Chinese President Xi Jinping, as well as it does give the opportunity for the United States and Iran to actually sit down leader to leader. So I'm certain there will be news affecting the market this week. Just something to keep your eyes on.

Mm-hmm.

That's a great point. That's the kind of event that you really, especially with the current administration, you don't know what's going to come out of it. I think a lot of it is going to be kind of standard handshakes and and speeches, but there certainly could be verbal conflict potentially with with the amount of wars that are going on right now and and some of the you know, countries that are either involved or not.

have different opinions about how these things should be playing out. Meanwhile you've got obviously the all the tariff discussions, which we didn't get into a lot today, 'cause it's kind of been an ongoing saga for the last two plus years, but certainly there will be some discussion around that this week as well.

Yeah, one of the key points for that discussion with Xi Jinping will be over an expiring trade deadlines. So keep an eye out for that.

Good call.

All right, gentlemen. James, Alex, thank you so much for the time and the wisdom as always. Let's talk again next week.

Thanks, Sean. Have a good one.

Thank you much.

And 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.