In the just-released FOMC statement, the Fed announced the first pause in Fed Fund rate hikes since it began hiking in March of 2022. This marks a significant moment in the Fed’s inflation-fighting campaign. Their guidance has been careful to point out today’s decision is not meant to signal the end of rate hikes, but rather to give more time to see the effect the rate hikes and Fed bond portfolio runoff are having on current monthly economic data, given the lag time those actions historically have. This pause was in line with the market’s consensus expectation.
In addition to the policy statement, also released are a fresh set of Summary of Economic Projection “dot” plots from each of the Fed governors. Given the moment we are in — a pause in rate hikes, but with inflation still elevated, economic activity showing some signs of slowing but employment trends still strong — these forward projections are important signals for markets to consider what comes next, and when.
Today’s pause keeps the Fed funds range at 5.00% to 5.25%. The market’s terminal rate projection, at 5.50% or higher, will not only set expectations for additional hikes at upcoming FOMC meetings, but also pushes further out when economic conditions will deteriorate enough that rate cuts begin.
We are at a point of transition in terms of the level of inflation, employment, economic activity, and Powell and the FOMC with their forward policy plans. And there are other considerations still worth watching: credit constriction by banks, the pace of China’s and global economies, the housing market, and even the ongoing war in Ukraine.
With today’s guidance digested, the bond market will adjust its forecast of when a terminal rate will be reached and how long the Fed will stay there before a first possible rate cut. That requires some complicated calculus-forecasting recession pressure, and the evolving global forces as well. That exercise will be a bumpy one no doubt as the monthly economic indicator data paints the picture of the speed and breadth of the effect of the rate hikes and bond runoff.
It’s notable that the market’s projection of a first rate cut has been pushed out into 2024, even before today. That’s not to imply mortgage rates won’t begin to fall from current levels, but the timing of such a move is still subject to a great deal of variability.
What Do Borrowers Do Now?
Originators should explain to borrowers looking to finance the purchase of a home that the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty. Mortgage rates are lower than the highs they reached last November but have trended sideways in a 0.500% range since early March. Further declines will come with lower inflation and a weaker employment market.
The available housing inventory is still tight and will remain so for years to come. After finding a suitable home for purchase, the best course of action is to secure financing quickly to avoid the worst possible market volatility that could upend those plans.
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