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 over the past year, today’s policy decision was expected. Today, the focus will be on any fine nuances in the statement or the press conference that may shed light on the conditions and expected timing of the Fed’s anticipated tapering of the SOMA bond purchase program.
The usual Wall Street analysts’ dissection of the policy statement will be published shortly. That leaves the press conference to provide additional clarity on what Chairman Powell and the rest of the Fed board’s current expectations are for the SOMA bond purchase program. The bond market wants to know how the Fed sees the most recent pace of vaccinations, the employment picture, and their effect on the economic re-opening changing any of their current policy guidance.
The Fed has made clear recently that the first order of business will be to taper the bond purchase program; rate increases won’t occur until that’s addressed. Of course, for mortgage lenders, tapering bond purchases 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 that probe changing employment and economic factors from a variety of angles and timing perspectives. Those will all lead back to trying to pin down when this first step toward normalizing policy can be expected.
The Fed has the tricky task of managing its desire to provide transparent guidance while also avoiding the kind of “taper tantrum” then Fed Chair Ben Bernanke set off in 2013. In just 56 days that year (from May 2 to June 27), Bernanke’s unexpected comment about tapering bond purchases sent the national average 30yr fixed mortgage rate up to 4.46% – a whopping increase of 1.11% in that short time span. The term “taper tantrum” was quickly coined from that experience.
Now the Fed is trying to avoid a similar over-reaction again – and in an unprecedented environment, arguably with as much unknown as in 2013. To say they have a lot to consider while trying to be transparent is a gross understatement. The equity markets have been expecting a fast and furious recovery. Indeed, some sectors of the economy are already reporting in that fashion, and even the most injured service sectors are showing recovery now. The question for the Fed is: how does this translate into full employment and then – much trickier to forecast – into inflation? It needs to understand that to some reliable degree before beginning to reduce bond purchases.
While 2020 was a year like no other, 2021 still presents uncertainty. Post-stimulus, there is not a clear consensus on the timing and breadth of the recovery. It will still take time for that to come into focus in a way that that allows for more predictable expectations.
What Do Borrowers Do Now?
Over the past month, sentiment in the bond market has reversed course a bit, allowing mortgage rates to fall back from mid 3% levels. 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 a mortgage loan as soon as possible and avoid the chance of higher rates.
Borrowers who want to finance the purchase of a home or homeowners who want to refinance their existing mortgage loan should appreciate that current mortgage rates are more volatile because of the higher uncertainties in the bond markets. This is creating a greater risk that rates may resume an upward trend.
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.