Dave Aielli - Solomon Financial Mortgage & Realty

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09/29/2026

Addressing Rising Rates

Last week we addressed the issue of inflation and inflation’s influence on interest rates. The Federal Reserve’s policy is to keep inflation at a 2.0% level as elevated inflation has a detrimental effect upon the economy. Certainly, elevated inflation has a detrimental effect upon every American’s pocketbook. The Fed tries to ease inflation by tightening monetary policy which can mean that they are raising their benchmark interest rate (the Federal Funds Rate) and/or decreasing the supply of money in circulation. These actions are designed to slow the economy at the same time.

Of course, the decision to tighten monetary policy is problematic if the economy is not strong. This is where the Fed’s balancing act comes in because the Fed’s goal is also a healthy economy. In other words, we don’t want to give the patient too much medicine, which would cause additional or even worse problems. To add another factor into the equation, there is the possibility that the Fed could raise interest rates as they did a few weeks ago but long-term rates such as rates on mortgages could go down as a result. How is that possible? First, the Fed controls very short-term rates. The Federal Funds Rate is the rate that banks charge each other to borrow funds overnight to make sure their balance sheets are "balanced." That is very short-term.

Long-term rates are affected more by the prospects of inflation, as discussed previously. When the Fed raises their benchmark interest rate, the markets perceive that the Fed is acting to bring inflation under control, which is a good thing. Therefore, it would not be unusual for the markets to react positively to this Fed action. However, it is also not unusual for rates to rise in anticipation of the Fed’s action, which is exactly what is happening. Going back to the economy, on Friday we have a report being issued which will give us a good idea if the Fed feels like the economy is strong enough to withstand higher short-term rates. That report is the monthly employment report for September. Last month we had a strong jobs report. Two strong reports in a row could denote the start of a trend after a long period of lackluster job growth. We expect the markets to watch this report closely in this regard.

09/22/2026

The Inflation Picture

This is a topic that we have visited before in the past, however with the latest bond market volatility, it is an opportune time to address the subject again with the Fed acting to address the issue this past week. When you view headlines such as the 30-year bond yields hitting their highest levels in close to 20 years, certainly going deeper is warranted. We start with this question – why are interest rates rising again? There are two main answers to this question. First, there are fears that inflation will continue into the future. There is a term for this inflationary condition, and it is called embedded inflation. Embedded means it is becoming a permanent or long-term part of the equation.

Why is inflation tied to higher interest rates? The simplest example is that inflation causes money to lose value in the future. If I lend you $100 for one year and the inflation rate is 10%, when you pay me back in one year, that $100 will only pay for $90 worth of goods. Therefore, I must charge an interest rate of 10% in order to break even. And we will state the obvious here—banks are not in the business to break even, thus the interest rate should be higher than 10%. Obviously, these numbers are fictitious, but they make the point.

The second answer is the fact that government borrowing is soaring. Why is the level of government borrowing an issue? We have record Federal budget deficits. Actually, mind-blowing deficits. That is what happens when you lower tax revenue and continue to spend. That is very simple math. Here we are talking about supply and demand. If the government sells more bonds to fund the deficits, they will need to promise a higher interest rate to investors if demand is strong enough. This forces other interest rates higher as well because the government is flooding the markets with supply. These problems are not ours only as inflation and government borrowing is happening around the world. Though the U.S. has some unique issues such as the aging of our population which is putting additional pressure on the deficits and especially the social security system.

09/16/2026

The New Fed is Not So New

The Federal Reserve’s new Chairman, Kevin Warsh, has promised changes in their modus operandi under his realm. Specifically, he has made pulling back on economic forecasting a cornerstone of his tenure. In his highly anticipated speech at the Jackson Hole Economic Symposium last month, Warsh explicitly criticized the Fed’s heavy reliance on "forward guidance"—the practice of telegraphing future interest rate paths. We agree with his assessment that "accuracy in economic forecasting is still just an aspiration." After all, many times we have stated within this commentary that predictions of the future are futile.

On the other hand, how many Federal Reserve members have made speeches in the past several weeks, calling for a rate increase based upon their predictions that inflation is not going to get better without some intervention? While we don’t have an exact count, enough of them have come out on this side of the equation that the markets were predicting a 60% chance of a rate increase around the first of this month. Another prediction of the future. Our point here is not to insert our own prediction of a rate increase, but to point out that the prediction game is not going away under Warsh’s tenure. As a matter of fact, with so many currently playing in the prediction markets, we as a culture are currently getting more invested in predictions, not less.

Two factors could keep the Fed from raising rates this week. First, the feeling that the Middle East conflict is not only going to quiet down, but oil and other commodities are going to start flowing freely again through the Strait of Hormuz. Secondly, evidence that our inflation rate is slowing and the economy is slowing with inflation. Warsh’s Jackson Hole speech indicated that the economy was strong. The most recent quarter’s 1.5% growth rate does not seem that strong to us, and the latest jobs report was evidence that, while unemployment remains low, job growth is still below normal despite a rebound last month. Also, last week’s inflation reports were elevated as expected. Will the Fed raise rates? We will get our answer tomorrow.

09/08/2026

Labor Day Jobs

Over Labor Day weekend the markets were able to ponder the latest employment report. The job sector has been up and down for the past eighteen months and after a dismal report in July, there was hope for an upturn with regard to the August numbers. As it turns out, in August the economy added 162,000 jobs. In addition, the past two reports were revised upward by 55,000 jobs resulting in a net gain of 217,000 for the month. The headline unemployment rate remained at 4.1%. Overall, these numbers were seen as a definite rebound from the lackluster July report.

On the inflation side, wage growth increased by 0.3% from July and 3.1% year-over-year. These numbers are vitally important because it is imperative that the American consumer’s wage growth meets or exceeds the growth in prices that consumers are experiencing. We are not only talking about everyday gas and other commodity prices, but long-term costs such as housing. Strong wage growth helps make mortgage and rent payments more affordable in the long run. Of course, strong wage growth can also fuel inflation, which is something that the Federal Reserve is watching very closely.

Speaking of the Fed, they are meeting next week for the first time since their July get together. The minutes of their July meeting were released in mid-August and there was certainly some inclination towards raising their benchmark interest rates. The August jobs report will likely add to this sentiment. Despite the concern regarding increasing inflation, we had a fairly benign consumer price index report released last month. The CPI index for August is due to be released this Friday and will serve as another important reading for the Fed to chew on when they meet next week. Another bit of good inflation news would be a good bit of am******on to hold the hawks off at this meeting.

09/01/2026

Labor Day Weekend

This upcoming Labor Day weekend will have a special meaning with regard to the American labor force. Always held on the first Monday in September, this particular Labor Day is on the very last possible day – September 7th. Why is that important? Typically, the August jobs report is released after Labor Day. But this year, Labor Day weekend will feature both the August jobs report on Friday and Labor Day on Monday. Thus, Labor Day weekend will really have an extra focus on the labor market. Considering the weak employment report released for July, we will be hoping for a last minute surge as the summer comes to a close.

Of course, Labor Day weekend is also the unofficial end of summer, even though fall does not start for a few weeks. Kids are back in school and that means that summer vacations are over. Traditionally this weekend represents the start of the fall real estate season as well. The fall real estate season is usually not as strong as the spring market, however in our present economy the direction of interest rates could have as much influence on the real estate market as the calendar. We had an early real estate spring this year because rates eased, but late spring and summer were a bit quieter as mortgage rates reacted to higher energy prices caused by the conflict in the Middle East.

The economy has certainly slowed a bit as the year progressed. Last week the estimate of the second quarter’s economic growth was not changed from the original estimate. The 1.5% growth rate by itself is indicative of an economy muddling along, which is not surprising considering the tepid employment sector. In any other time, a slow economy would have brought interest rates down from today’s levels, but elevated energy prices have kept the markets on edge. Theoretically, a slower economy should reduce energy consumption which would counterbalance somewhat the influence of the Middle East conflict. But markets don’t always react in concert with theory. Regardless of this conundrum, we hope everyone had a great summer and happy Labor Day!

08/25/2026

The Fed Has Another Worry

In our last commentary we discussed the Federal Reserve’s reaction to what they termed "elevated inflation." The recently released minutes from their last meeting and several speeches delivered since that meeting have served to indicate that there are Fed Governors who are ready to increase interest rates in the near future. Instead, they woke up to a big surprise during the early part of August. Employment data for the month of July revealed that 23,000 jobs were shed, In addition, the previous two months of job gains were revised downward by 103,000 jobs.

Taken together, that is a loss of 126,000 jobs. Since the economy has been adding only about 30,000 jobs per month over the past year, that number is extremely significant. Taken together with recent data showing a 1.5% growth rate for the economy during the second quarter (subject to revisions) – the Fed has another worry on their hands. That worry is slowing economic growth. It will be that much harder for the Fed to raise interest rates if the economy is not growing strongly enough. They can’t lower rates in the face of elevated inflation, and they can’t raise rates because of slow economic growth. That is called being between a rock and a hard place.

The good news is that the Fed is not meeting in August. Their next meeting is in mid-September. By that time, we will have another jobs report to chew on, as well as one revision of the measure of economic growth for the second quarter. Plus, there will be a few inflation readings as well. Let’s hope that the economy reverses some of these job losses and inflation eases as the situation in the Middle East calms down. Leaving rates steady would not be as much of a concern if these two scenarios come to fruition. In the above forementioned "rock and hard" place situation, this is the best we can hope for. We won’t have to wait very long to see some evidence as the Fed’s favorite inflation statistic is due out this week and the jobs report for August will be released at the end of next week.

08/18/2026

In Case You Are Wondering Why

A few weeks ago, the Federal Reserve’s Open Market Committee met to discuss Fed policy. All eyes were on the Fed as recent events in the Middle East had unleashed further pressure upon inflation. In the meantime, the Chairman of the Federal Reserve, Kevin Warsh, was conducting his first meeting. At the end of the day (or precisely Wednesday early afternoon), the Fed decided to keep their benchmark rate steady for the fifth straight meeting, which was not a surprise. It was also not a surprise that three members of the committee voted to increase interest rates in light of recent events.

Even though the Fed kept rates steady, the bond market forced longer term interest rates higher immediately. Thus, the question was – why did interest rates rise when the Fed kept their rates steady? When considering the circumstances, it is important to remember that the Fed’s benchmarks rates are very short-term and the interest rates which rose were longer-term rates. Thus, the spread between short-term rates and long-term rates widened. This explains what happened technically but does not explain the poor reaction from the bond market. To achieve that answer, we must dig deeper.

The Fed’s statement after the meeting acknowledged that inflation was elevated. That statement by itself would worry the bond markets, even though the Fed was stating the obvious. Moving further, in the face of elevated inflation, the Fed did absolutely nothing. It kept status quo. The bond market expects the Fed to be more vigilant in this regard. A stronger statement would have helped mitigate the reaction. Meanwhile, from a political standpoint, the Administration for months has been putting a lot of pressure on the Fed to lower interest rates and since the new chairman was the Administration’s pick, the markets are worried that the Fed won’t be vigilant enough. This concern comes despite the fact that Chairman Warsh has a history of being quite conservative in this regard.

08/11/2026

Its All Jobs and Iran

Sure, there is a lot more to the economy than these two factors. But we can’t think of two headlines which have garnered more attention this year. Obviously, the Iran situation affects the economy and the next result of the conflict has been higher energy prices, rising interest rates and flagging consumer confidence. But overall, the economy has kept moving forward, buoyed by a resilient stock market. The employment sector is a primary indicator of the health of the economic sector. That is why last weeks report was being watched so closely.

So how did the employment report come out? The economy lost 23,000 jobs in June. This number was significantly below expectations. In addition, the previous two months of job gains were revised downward by 103,000 jobs, making the net loss for the month 126,000 jobs. Despite the loss of jobs, the unemployment rate fell by 0.1% to 4.1%, which is a continued anomaly related to the sluggish workforce growth. On the inflation front, wage growth increased by 3.2% annually, lower than expected. Overall, this was seen as a weak report and creates additional concern regarding the economy overall at a time when the conflict overseas remains a major factor contributing to this concern.

Which leads us back to the conflict in Iran which has spread throughout the Middle East. After weeks of heavy attacks and counter attacks, it appears that the parties have started talking again and a cease fire could be in the works. Of course, we have heard and lived through this story several times before. Let’s hope cooler heads will eventually prevail and a ceasefire becomes the basis for a permanent truce. The markets could use some good news because we are due for the July inflation reports this week and it is not likely that this news is going to be good. Remember, the markets are not reacting to what happened last month, they will react to what they think will happen next month. That’s where hope comes in. The phrase "hope is eternal" means that optimism never dies!

08/04/2026

Employment Report and Iran in Focus

First, we thought that the employment sector was recovering from a period of lackluster gains. Then we thought that the conflict in Iran was winding down. In July we found that both thoughts were quite premature. In early July we found out that the economy added only 57,000 jobs in June and the previous two months of gains were revised downward by 74,000 jobs, a net loss of almost 20,000 jobs for the month. Then in mid-July, the agreement between Iran and the U.S. collapsed as the rockets began firing again and traffic was disrupted within the Strait of Hormuz. Moving into August, the hope is that both trends are reversed again.

We begin August with the July employment report, which will be released this Friday. During the past 12 months, the economy has added an approximate average of 32,000 jobs per month. This average is significantly below the pace of previous U.S. economies which were non-recessionary. As we have previously mentioned, the sluggish population growth is one factor contributing to these low averages, which explains why the unemployment rate is not rising. This leads to a key question – If job gains remain subdued, will the unemployment rate start trending higher? Friday’s report might provide a clue to this puzzle.

Meanwhile, the situation in Iran has threatened to escalate even further than when it intensified during the initial conflict. Our military bases throughout the Middle East were being hit in the middle of July. Shipping was again disrupted and energy prices once again headed upward. This news came on the heels of the tamest inflation reports we had seen all year, which was quite ironic. Long-term wars are harbingers of inflation even when energy supplies are not disrupted because of increased government defense spending. Again, ironically this spending can cause an increase in the rate of job creation. Regardless, it is everyone’s hope that the war does not evolve into a long-term engagement.

07/28/2026

Split Fed

The Federal Reserve has new leadership in the form of Chairman Kevin Warsh. But that does not mean that the direction of this government entity is changing all that much. Sure, Chairman Warsh brings a new perspective to the Fed. He is intent on changing how the Fed communicates with the markets, the size of the Fed’s balance sheet and even its view on inflation, as reported by CNBC. For example, we can expect less in terms of projections from the Fed in the future and a move towards a smaller balance sheet. He would also like the Fed to embrace changes that AI could bring.

However, amongst all these planned changes, there are still fundamental differences between the thinking of the Fed Governors. The minutes from the last meeting – the first chaired by Warsh – is a prime example of this discordance. There are members of the Fed who would like to raise interest rates now in light of the present elevated level of inflation. There are others who believe that this inflationary period is temporary and we should wait it out by keeping rates level. And there are some who believe that lower rates are warranted due to slower economic growth which could portend a recession. The result was a stalemate, and the Fed kept rates right where they are at the last meeting.

The Federal Reserve Open Market Committee meets again this week, and the economic situation has not changed all that much. Iran is still vacillating between war and armistice. Inflation is still elevated. Long-term interest rates remain elevated. Yet, the economy does not appear to be slipping into recession territory. Instead, the economy seems to be humming along at a slow but positive pace, being held back by muted hiring but being supported by continued consumer spending. So, what will the Fed do when they meet this week? Most are betting on another split decision which will result in the Fed keeping rates where they are. In other words, the more things change, the more they stay the same. Stay tuned for the announcement early Wednesday afternoon.

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