In the just-released FOMC statement, the Fed announced no change to the Fed funds rate. This was in line with Fed funds futures trading and consensus market expectations. The Fed guidance the market is looking for today will come from wording changes to the just released policy statement and Fed Chair Powell’s press conference, which will begin at the bottom of the hour. The Fed funds range remains set at 5.25% to 5.50%.
Changes to the policy statement will set the stage for the press conference, so we should listen to commentary about any unexpected changes in that wording. Bond market participants will be sensitive to changes relative to the recent surge in the level of GDP and the increase in September inflation readings. Any additional attention given to those factors will raise the chances of another rate hike coming on the last FOMC meeting of the year, which concludes on December 13. To date, Chair Powell has not stated they have reached a terminal rate and that there will be no further rate hikes in this monetary policy cycle. Regardless of policy statement revisions, it’s unlikely Chair Powell will make that statement today.
The Fed is holding off on a rate increase today despite the surge in GDP and higher inflation readings because there is clear evidence their prior rate increases have started to slow consumers and businesses. Another factor is the impact higher term interest rates will have. Mortgage rates are a good example of this.
According to BankRate, the 30yr agency fixed rate was being quoted at 7.00% at the beginning of June, at 7.59% at the September FOMC meeting, and it’s currently quoted at 8.05%. This recent rapid increase in term rates, to the highest levels in some 23 years, will do more of the Fed’s “demand destruction” work to reduce inflation for it going forward. That gives the Fed the luxury of continuing to wait for the impact of its’ earlier rate hikes to take full effect.
The ongoing strength of the economy and job market demand has changed recession expectations to a “no-landing” scenario. One word of caution — a soft landing, where the economy avoids recession altogether, is an extremely rare occurrence historically. That keeps the possibility of a recession and lower rates in the conversation. But the September inflation readings are keeping the market on alert for the Fed reacting with another rate hike and possibly even pushing the 5.625% terminal Fed funds projection higher.
Before the next meeting ending December 13, we will have two months’ worth of economic indicators to absorb. And there is still the possibility of a federal government shutdown on November 17 which could interrupt the flow of fresh information.
As mentioned, the impact of previous rate moves is becoming more relevant moving forward as the lagging effect has run its course and economic indicators are starting to show effects of the rate hike campaign. Meanwhile, there’s the impact of much higher term interest rates, war in the Middle East, rising gas prices, the impact of the UAW strike, China’s economic situation, a possible federal government shutdown, and the increased Treasury auction calendar. All of this factors into market rate expectations. These are many different and opposing forces at work.
As rates are published each day this leaves the mortgage market subject to an unusually high degree of uncertainty. Not to mention the stress of adjusting to lower origination volume our industry continues to struggle with.
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 have risen to levels not experienced in many years but are still at risk of being pressured higher, in the short term as well as the intermediate.
The available housing inventory is still tight and will remain so for years to come. After finding a home for purchase and achieving an accepted offer, the best course of action is to secure financing quickly to avoid the worst of possible market volatility that could upend those plans.
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