In the just-released FOMC statement, the Fed announced no change to the Fed Funds target rate, leaving it in the range of 0.00% to 0.25%. As has been the case recently, today’s policy decision was expected. The question becomes, other than some wordsmithing in the policy statement itself, what do we pay attention to today?
In addition to the press conference that follows shortly, we do have fresh SEP projections to consider (those are the individual governors’ Fed Funds dot plot rate projections for the next three years, which includes their inflation expectations). It will be instructive for the bond bears, inflation hawks (or pick your own favorite carnivorous mascot) to look at the individual Fed governors’ expectations with the benefit of knowing how the vaccination and economy has recently evolved. And those same Fed governors know better than anyone how the impact of the $1.9T American Rescue Plan spending will balloon the Treasury bond auctions and how that will impact the bond markets and in turn, mortgage rates.
In the Q&A press conference that follows today’s announcement, expect a robust series of questions about when the Fed will have to change their current policy stance. With the rapidly changing environment (due to the vaccination rollout), there are many things to question.
For example, given the nod Chair Powell has given to accepting the rising term rates to date, is there some higher point that would eventually trigger the Fed to move the bond buying program to longer dated maturities to counteract that? On the flip side, as the economy enjoys a “V” shaped recovery in 2021, and even if inflation doesn’t accellerate the way many analysts are expecting, when will the Fed signal the beginning of tapering the bond buying program (which is still supporting mortgage rates)? Those are just two of many similar questions we can expect to hear thrown at Powell.
With the Fed committed to holding short-term banking rates low through at least 2022, the bond market is more likely to be influenced by economic outcomes dictated by the falling rate of COVID-19 infections, the increasing pace of vaccinations, and when those two variables cross – such that we reach a point of “herd immunity.” If the equity markets have it right, the recovery may come fast and furious. Some of the prevailing thought is if it does, it will push inflation well over 2% and force the Fed’s hand sooner than what Powell has been saying. Its too early to tell if that could occur in 2021, or not until 2022, or even as late as 2023. But there is chatter about it and that could keep mortgage rates from moving back lower.
While 2020 was a year like no other, 2021 presents more uncertainty. Although the anticipation is great – and building – there is not a clear consensus on the timing of the recovery, employment in the most COVID-impacted sectors, and especially about where inflation levels are headed. It will still take time for each of these factors to come into better focus, and as they do, each has the ability to influence rates.
What Do Borrowers Do Now?
As we have seen over the past month, sentiment in the bond market can change quickly and drive mortgage rates higher. Despite the public’s expectation that only a 2-handle mortgage rate is a “low” rate, 3% mortgage rates are still close to historic lows. It is prudent to rate lock mortgage loans as soon as possible and avoid the lopsided chance of even higher rates.
For borrowers looking to finance the purchase of a home or refinance their existing mortgage loan, they should appreciate that current mortgage rates are more volatile because of the higher uncertainties in the bond markets. That’s creating a greater risk that rates may continue the trend higher.
Whether or not interest rates end up lower at some point, in the timespan a rate lock decision is required of a borrower, borrowers should understand those factors and rate lock at the earliest possible moment.