Logan Mohtashami on Deciphering the Complex Influences on Mortgage Rates

The "Honey Badger" labor market, long resilient, may finally be showing signs of fatigue, according to lead analyst Logan Mohtashami, whose own forecasts now indicate underperformance. This critical shift, combined with a Federal Reserve seemingly committed to a reactive "play catch-up" strategy, sets the stage for a potentially volatile period for mortgage rates and the broader economy.

Key Insights

1. The "Honey Badger" Labor Market Shows Cracks: Mohtashami Flags Underperformance Against His Own Forecasts

Logan Mohtashami highlights a significant development in the labor market: it's now underperforming his own estimates, a stance he hasn't taken for some time. This comes despite a headline jobs report beat, which, after negative revisions, paints a different picture.

"Today's jobs report had a little bit of everything for anyone. But after the negative revisions of 95,000, the year to date monthly job creation is now at 124,000... I went into the year at 133 to 151,000... we're slightly under now at 124,000 per month." - Logan Mohtashami

Mohtashami explains that his projection for average monthly job creation for the year was between 133,000 to 151,000. However, with recent data and substantial negative revisions (totaling 95,000), the year-to-date average has fallen to 124,000 jobs per month. This is a crucial inflection point, as Mohtashami had previously noted the labor market consistently outperforming his more conservative estimates. The unemployment rate is also showing signs of ticking up, with Mohtashami calculating it could have been 4.3% instead of the reported 4.2% based on finer details.

This underperformance, especially in the context of what Mohtashami terms "Godzilla tariffs" and other economic shocks like withdrawing money from the system and firing federal workers, makes the economic outlook "a little bit now, shaky." For investors, this signals a need for increased caution. If the labor market, a key pillar of economic strength, is indeed weakening more than headline numbers suggest, the foundation for economic growth becomes less stable, potentially impacting consumer spending and, consequently, corporate earnings and market sentiment.

2. Fed's "Play Catch-Up" Strategy: A Recipe for Delayed Action and Potential Policy Missteps

A major concern voiced by Logan Mohtashami is the Federal Reserve's apparent strategy of waiting for definitive negative data before acting, a stance he believes could lead to them being "too late." He specifically references comments from the President of the Cleveland Fed.

"She literally said this. I'm going to wait until we see that it hit the data and then we'll play catch up... Catch up basically means we're going to be too late." - Logan Mohtashami

This reactive approach contrasts sharply with Mohtashami's preference for proactive caution. He notes the irony that even as the Cleveland Fed President suggested businesses weren't planning layoffs, Procter & Gamble (headquartered in her district) announced 7,000 layoffs. The Fed's rationale, according to Mohtashami, is that their models advise against cutting rates amidst tariff-induced shortages due to inflationary risks. However, he points to the COVID era's zero interest rate policy during shortages as a contradictory example.

For market participants, this "catch-up" policy implies a period of heightened uncertainty. If the Fed waits for clear signs of economic breakage, any subsequent easing might be more aggressive but could come after significant economic damage has occurred. This increases the risk of policy error and could lead to greater market volatility as investors try to anticipate the Fed's delayed reactions. Mohtashami suggests the Fed feels it needs "cover" (i.e., overtly weak data) to cut rates, a stance they are openly communicating.

3. The Fed's Iron Grip: Why 65-75% of Mortgage Rate Swings Trace Back to Monetary Policy

Logan Mohtashami firmly asserts that Federal Reserve policy is the dominant factor influencing the potential range of the 10-year Treasury yield, which heavily impacts mortgage rates. He quantifies this influence as accounting for 65% to 75% of the yield's cyclical range.

"65 to 75% of where the 10 year yield can range within a cycle is still Fed policy." - Logan Mohtashami

He dismisses the notion that factors like government deficits are primary drivers, pointing to the 1990s when deficits and debt-to-GDP were lower, yet 10-year yields were significantly higher (6-8%). This historical perspective underscores that the Fed Funds rate sets a "bandwidth" for where Treasury yields, and by extension mortgage rates, can trade. Even comments by former Minneapolis Fed President Neel Kashkari, cited by Mohtashami, confirm the Fed's capacity to lower mortgage rates by cutting its policy rate, though they may choose not to do so.

This insight is crucial for investors: while economic data and market sentiment play a role, the Fed's policy stance is paramount. Therefore, understanding the Fed's thinking, its inflation targets, and its assessment of "neutral" versus "restrictive" policy is key to forecasting mortgage rate trends. Mohtashami notes that President Trump's call for a 1% rate cut would, in his view, bring the Fed Funds rate to a "neutral" level of around 3.5%. The Fed currently believes it is "modestly restrictive," not yet at neutral, and certainly far from an accommodative stance.

4. Construction Sector's Tenuous Strength: A Critical Recession Indicator Watched Closely by Mohtashami

While the broader labor market shows signs of slowing, Logan Mohtashami points to the residential construction jobs data as a specific area of interest. Historically, this sector is a reliable leading indicator for recessions, and its current performance is mixed but not yet decisively negative.

"Not only did we show growth [in construction jobs], but the previous month was revised higher. So now we only have one negative report for the year and just very slow growth being creation. But it is growth." - Logan Mohtashami

Before the latest jobs report, two of the four previous residential construction jobs reports were negative. A third negative would have signaled a more material weakening. However, the latest data showed growth, and the prior month was revised upwards, leaving only one negative report for the year. Mohtashami emphasizes that in previous recessions, this data line "no equivocation heads lower." Currently, it's characterized by "very, very slow growth" or a "back and forth" pattern.

For investors, the construction jobs trend is a vital data point to monitor. If this sector begins to consistently shed jobs, it would be a strong historical signal of an impending or current recession. Its current resilience, albeit weak, offers a counterpoint to some of the more bearish interpretations of other economic data. The question remains whether it will maintain this slow growth or succumb to broader economic pressures.

5. Beyond Economics: How Political Feuds and Tariff Wars Could Unconventionally Steer Mortgage Rates

Logan Mohtashami delves into a more speculative but intriguing area: how non-economic factors, such as the public dispute between former President Trump and Elon Musk, could indirectly influence mortgage rates, primarily through their potential impact on tariff policy.

"So what is one thing, Congress has the power to take the tariffs away... If it became apparent that the tariffs were going to like be rescinded, then maybe Fed presidents go, okay, we could start talking dovish. That's the only thing I can make up out of that." - Logan Mohtashami

The core of this hypothesis lies in the Federal Reserve's stated position that tariffs are a key consideration in their policy decisions. If a figure like Musk were to leverage his influence to rally political opposition to existing tariffs (the "Godzilla tariffs" as Mohtashami calls them), potentially leading to their removal by Congress, it could alter the Fed's calculus. With the inflationary pressure from tariffs removed, Fed officials might feel more comfortable adopting a dovish stance and considering rate cuts sooner or more significantly.

While Mohtashami acknowledges the speculative nature of "political economic theory," this highlights the interconnectedness of policy, politics, and markets. For investors, it serves as a reminder that geopolitical events and even high-profile personal disputes can create unforeseen ripples affecting economic policy and, consequently, interest rates. The uncertainty surrounding tariff deals and their economic impact remains a significant variable for the Fed and the markets.

Insightful Quotes from Logan Mohtashami

On the Fed's reactive stance: "She literally said this. I'm going to wait until we see that it hit the data and then we'll play catch up... Catch up basically means we're going to be too late."

On the primary driver of mortgage rates: "65 to 75% of where the 10 year yield can range within a cycle is still Fed policy."

On the shifting labor market dynamics: "But it is interesting that this is the first time that I could say this in a while. The labor data is underperforming my estimates. And that has been a while for me to say that."

Market Implications

Logan Mohtashami's analysis points to a complex and potentially precarious period ahead for markets, particularly concerning interest rates and economic growth. The key market implications derived from his insights include:

1. Increased Bond Market Volatility: With the labor market now underperforming Mohtashami's own projections and the Fed admittedly in a "wait and see" mode, bond yields (and thus mortgage rates) could experience heightened volatility. Each new piece of significant economic data, especially on jobs and inflation, will be intensely scrutinized for clues about the Fed's next move.

2. Focus on Fed Communication: The Fed's "catch-up" rhetoric suggests they need clear "cover" in the data to justify rate cuts. Investors should pay extremely close attention to Fed officials' speeches and statements, looking for any shifts in tone or acknowledgement of weakening conditions. The timing and magnitude of any potential rate cuts (e.g., 25 basis points versus a more aggressive 50) will depend on how rapidly the data deteriorates.

3. Sectoral Divergence: While the overall labor market is slowing, specific sectors like construction are still showing marginal growth. This divergence could lead to mixed signals for the economy. A sustained downturn in construction would be a strong recessionary signal, but its current resilience might delay broader market pessimism. Conversely, the observed weakness in government employment could act as a drag on overall growth.

4. The Tariff Wildcard: The ongoing uncertainty surrounding tariffs (Mohtashami's "Godzilla tariffs") remains a significant overhang. Any developments suggesting an escalation or, conversely, a resolution (perhaps influenced by unconventional political dynamics as discussed with the Trump-Musk example) could swiftly impact Fed policy expectations and market sentiment. An easing of tariff pressures could give the Fed more room to cut rates.

5. Strategic Positioning for a "Late" Fed: If the Fed is indeed late to react to a slowing economy, there's a risk of either prolonged restrictive conditions or a sharper, more disruptive easing cycle later. Investors might consider strategies that hedge against policy error or allow for nimble adjustments as the Fed's actions (or inactions) play out. The path to a "neutral" Fed funds rate, which Mohtashami pegs around 3.5%, could be drawn out and subject to these evolving dynamics.

In essence, Mohtashami's perspective suggests that while Fed policy is the dominant long-term shaper of the rate environment, the current confluence of slowing labor data, a reactive Fed, and unpredictable external factors like tariffs creates a challenging environment for forecasting and investment.