As a movie fan, the first thing that popped into my head as I start writing this note is a paraphrase of the famous line from All About Eve spoken by Bette Davis: “Fasten your seatbelts, it’s going to be a bumpy (ride) night.”
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. Any nuances in the policy statement could cause a market reaction. But where things can get really interesting today will be any any changes indicating earlier Fed Funds rate hikes in any of the Fed Governor’s SEP dot plot projections. We get a refreshed version of those today. And certainly anything from Chairman Powell at the Press Conference regarding discussion on beginning the bond purchase program tapering. Both of these later possibilities are somewhat expected today so the disruption to markets is difficult to predict. And the key word here is “somewhat.” For reference, most investors, economists, and analysts currently expect the Fed to begin bond purchase tapering in the first half of 2022 and not to make the first Fed Funds rate hike until 2023.
There are also expectations for guidance on the short-term mechanisms the Fed manages around the Fed Funds rate as it deals with all of the excess cash, excess liquidity, that it’s easy money programs have created. While that may be of less interest to the mortgage lending industry, that mechanism still has relevance to mortgage pricing. Indirectly yes, but moreso on the lines that it's tied into the Fed’s projection of the health and pace of the economy.
What will grab the mortgage lending industry’s attention is guidance on tapering the SOMA bond purchase program. Despite everyone expecting this, if the timing discussed is any faster than what is expected, it will likely drive MBS prices lower. The key to how far and how long lasting that movement is will be the details of the tapering process. But we may not get those at this early point.
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 normalizing policy can be expected. Specifically, the press will probe for details on when bond purchase tapering will begin, how tapering will be scaled back over time and when the first rate hike will occur.
The Fed has the tricky task of managing its desire to provide transparent guidance while 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.
The Fed is trying to avoid a similar over-reaction again by better communicating its current outlook. Key questions for the Fed are: when does the economy reach full employment? Will a surge in labor supply come in the fall as stimulus payments wind down? And how is inflation evolving, are the details currently painting inflation as transitory changing?
The economy, labor and inflation are always dynamic, reflecting the constant evolution of the U.S. and global economies and societies. Throw in a pandemic, then mix in fiscal stimulus, central bank monetary reactions and a recovery from the pandemic and you have no historical precedent to use for forecasting outcomes. Interesting times indeed.
What Do Borrowers Do Now?
Mortgage rates are still close to historic lows. It is prudent to rate lock a mortgage loan as soon as possible and avoid the increasing chances of higher rates in the intermediate term.
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.