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» VISIT US ONLINE @ DSNEWS.COM 27 webinar, so it is worth describing how and why it has changed. e Federal Reserve has pressed pause on this tightening cycle for the foreseeable future, and it almost sounded like the central bank believes it is over, or close to it. is differs from Moody's Analytics forecast, which expects three additional 25-basis point rate hikes and puts the terminal rate at 3.25 percent for this cycle. A standout from the Federal Open Market Committee's January statement was that the committee dropped any bias toward hiking rates. In December, members expected multiple rate hikes; now they are unsure of the direction of the next move. In fact, the bar for hiking rates was raised noticeably, and strong growth is no longer sufficient. During his news conference in January, Fed Chair Jerome Powell said that to justify a rate hike, he would need to see very strong growth that pushes the unemployment rate substantially lower. Powell added that inflation has to accelerate and inflation expectations need to increase. ough the Fed has pivoted, it is adapting to recent developments in financial markets, heightened downside risks to the outlook, and an absence of inflationary pressures. Being patient and pausing this cycle within the range of estimates of the long-run neutral rate is appropriate and could extend the life of this expansion. e Fed has killed its fair share of expansions, but likely not this one. Mortgage rates and other long-term rates react fairly rapidly if there is a sense that the policy position has changed, as was confirmed by the December Federal Open Market Committee meeting and then more strongly by the January press conference. As a result, mortgage rates fell perceptibly; the Freddie Mac 30-year fixed rate fell 40 basis points from November to January, and this has pulled down our mortgage rate forecast by about the same over the next year. While this change in the forecast will likely help prop up home sales and house price growth, it is too small to affect mortgage debt service, given that delinquencies are already at a cyclical low point. Overall, we don't expect delinquencies to rise significantly over the next two years. You mentioned that many economists refer to the yield curve as the infamous harbinger to the recession. Could you discuss this further? Concerns about an inversion in the U.S. yield curve, which we define as the difference between the 10-year and three-month Treasury yields, are fueled by its reputation as a recession signal. Normally, 10-year yields are significantly larger than three- month yields due to the longer maturity period. Since the mid-1960s, cases of the yield curve inverting—that is, of three-month Treasury rates exceeding 10-year rates—have been nearly perfect in predicting recessions. On average, a recession occurs 15 months after the yield curve inverts. is correlation is most likely due to two- way feedback. When short-term rates are larger than long-term rates, financial institutions have much less incentive to lend long term, but long- term loans to finance business investment and home purchases are what sustain the economy. Tighter long-term credit also makes it more difficult to refinance debt, making financial distress more likely. In the other direction, uncertainty over the economy can cause financial institutions to move their portfolios away from stocks and corporate bonds and into long-term Treasuries, so that a deteriorating economy acts to push down the yield curve. However, a strong argument can be made that the relationship between the slope of the yield curve and the business cycle may have changed. For one thing, long-term rates are being depressed by a very low term premium and lower estimate (lower than in past cycles) for the long-run equilibrium Federal Funds rate, which is the main determinant of the three-month Treasury rate. erefore, the yield curve will be flatter than in the past and could more easily invert, increasing the odds of a false recession signal. What is the most rewarding aspect of your job? I would say a lack of monotony; the challenges facing the U.S. housing market are seldom the same year after year. For example, in 2007, we had a glut of homes on the market, now we have a shortage of listings. Also, there are many parts of the U.S. economy, including construction, the rental market, monetary policy, and mortgage regulation to name a few, that overlap with housing analysis. As a result, I have to be constantly on my toes and learn new things from our mortgage market and monetary policy experts. Being a housing analyst is sometimes stressful but is never boring. GET YOUR DAILY DOSE OF DEFAULT SERVICING NEWS Start your day with the most current and critical news on the mortgage default servicing industry from DSNews.com. Sign up for our e-mail newsletter and get the top stories delivered direct to your inbox every day. Register to receive your Daily Dose at DSNews.com GET YOUR DAILY DOSE OF DEFAULT SERVICING NEWS Start your day with the most current and critical news on the mortgage default servicing industry from DSNews.com. Sign up for our email newsletter and get the top stories delivered direct to your inbox every day. Register to receive your Daily Dose at DSNews.com "e median income of first-time homebuyer families is now less than 100 percent of the qualifying income for a median price starter home. While affordability is still better than at the peak of the housing bubble, it has been getting worse since 2012."

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