September 2021 FOMC Announcement: No Rate Change, but…

September 22, 2021

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 all year, today’s policy decision was expected.

But the focus on this FOMC meeting is on any additional guidance on when the Fed will begin tapering their SOMA bond purchase program and future Fed Funds rate hikes. This meeting is one of the four meetings each year with a fresh set of the Summary Economic Projections. The “SEP,” or the “dot plots” as they’re referred to because of the charting method used, are projections from each Federal Reserve Governor out two-and-a-half years.

That means they will extend out into 2024 for the first time. This will give bond markets and analysts a chance to see where the Governors each expect the economy to be by then – what they each expect in terms of the economic recovery.

The dot plots are released along with the policy statement at 1:00 p.m. Central time. A half hour later, Fed Chair Powell reads a prepared statement to the press and then takes questions. Expect Powell to emphasize that the dot plots are not a reflection of the consensus FOMC view, and as such are not as reliable of an indicator of the direction of future Fed policy decisions.

What’s Next?

We can expect the press to ask for more specifics on bond purchase tapering (although this is less of a focus, now that it’s understood it will start before year end). The greater focus will be on what the updated projections show in terms of:

  • How long inflation may run above the 2% desired metric, and Fed Fund rate hikes happen sooner and/or are larger than expected,
  • Or, if the COVID-19 pandemic will continue to significantly hold the economy back, inflation falls back to 2% (or below), and Fed Funds interest rate increases are fewer and/or are delayed from current expectations.

It’s the Fed Funds rate hike expectations that have a greater possibility of affecting term rates in the current market. And that’s where reactionary MBS price drops can push rate increases on rate sheets.

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 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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