In the just-released FOMC statement, the Fed announced no change to the Fed funds rate. This was in keeping with consensus market expectations. The Fed funds range remains set at 5.25% to 5.50%, a 23-year high and where it’s been for the past six FOMC meetings.
The Fed guidance the market is looking for today will come from wording changes to the just released policy statement and from Fed Chair Powell’s press conference. One anticipated change is a reduction in the pace of the SOMA bond portfolio runoff, the so-called “quantitative easing.” So nicknamed because if the Fed begins to keep less of the bond portfolio cashflow from being reinvested in the bond markets, that is effectively easing the stance of their restrictive monetary policy. While this is at odds with the inflation fight, the “why” behind such a change is to increase the reserve balances in the banking industry, which is another metric the Fed is closely watching.
Besides the usual policy statement focus and a possible quantitative easing announcement, today’s Powell press conference will be the attention-getter. We will have to wait until the June 12 FOMC meeting for the next refresh of the Fed Governor’s dot plot projections. The Powell press conference will begin at the bottom of the hour.
Changes to the policy statement will set the stage for the press conference, so we should listen to commentary about unexpected changes in that wording. The possibility the Fed decided to slow the pace of the runoff of its SOMA Treasury and MBS bond portfolio will be the most significant policy action it may take today.
What’s Next?
Investors are focused on how many times the Fed is planning to cut the Fed Funds rate in 2024. The ongoing strength of the economy and job market demand has the Fed firmly in a holding pattern on rates. The rate cut projection then is a matter of conditions changing enough for the Fed to move off its “higher for longer” stance. That will take several months of fresh economic data to play out.
Markets are trying to understand the degree to which the supply chain recovery and pandemic stimulus explain the positive economic performance, despite the restrictive Fed policy. And when the impact of those unique factors may fade enough that the impact of the restrictive Fed policy shows up in slower economic and job market growth.
There are still unique questions to be asked and answered. Has a recession only been delayed? If the Fed holds the terminal rate too long will a recession begin and become severe before the Fed cutting rates can address it? But those will have to wait until the Fed’s current policy stance sees inflation moving to its 2% goal.
Before the next FOMC meeting on June 12, we have most of two additional months’ worth of fresh economic indicators to come. Meanwhile, there’s the impact of higher term interest rates (think mortgage rates), war in the Middle East, the war in Ukraine, rising gas prices, China’s economic situation, continuing jobs market strength, a still expanding economy, and the increased Treasury auction calendar. All of which factor into day-to-day market movement volatility, if not changing rate expectations.
As rates are published each day, this leaves the mortgage market subject to a high degree of uncertainty. The point being, when the Fed is expected to begin rate cuts is far from the only influence on market movement.
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 continued to rise and are still at risk of being pressured higher.
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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