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July 2021 FOMC Announcement: No Rate Change, but…

July 28, 2021
The Federal Open Market Committee announced no change to the Fed Funds Rate at the July 2021 meeting.

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.

But the focus on this FOMC meeting, as well as the several past FOMC meetings, isn’t on the Fed Funds rate. It is all about the guidance on when the Fed will begin tapering their SOMA bond purchase program that’s been maintaining an excess of liquidity in the MBS and Treasury bond markets. And for those of us in the residential mortgage origination business, there’s an added level of anxiety in finding out how fast they plan to taper MBS bond purchases since that will inevitably push mortgage rates higher at the same time it reduces the volume of refinance activity. Perfect storm anyone?

There isn’t a fresh set of Fed Governor’s SEP dot plot projections for fed funds this time around either. One more reason the focus will stay on tapering. The policy statement may not mention specifics, but expectations are it will imply a reduced need for the extraordinary monetary accommodation measures the Fed still has in place.

We can expect Chairman Powell to mention the expected discussion of their taper plans in his prepared comments at the press conference. And he will certainly be answering a lot of questions about it given the surge in inflation readings. Influencing market rates in the opposite direction, and creating the fears of the recovery being derailed that explains why rates have been falling again, we can also expect him to also be asked about the delta variant of COVID-19.

What’s Next?

The Fed has the tricky task of managing transparent guidance, while avoiding the kind of “taper tantrum” that happened in 2013. The Fed is trying to avoid a similar over-reaction this time around.

The issues the Fed has to weigh as it makes its decisions are:

  • The level of excess liquidity its’ extraordinary measures are still providing,
  • When and how to taper those,
  • Inflation accelerating past its 2% goal and how that inflation is looking less transitory in nature,
  • Unemployment, underutilization, and all the other unique employment trends that are happening,
  • The winding down of Federal Relief payments,
  • The increase and potential increase of other federal spending plans,
  • And the impact of the delta variant of COVID-19.

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.

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