In the just-released FOMC statement, the Fed announced no change in the Fed funds rate. The rate cut campaign that had the last rate cut in November remains on hold for a fourth consecutive meeting. This keeps the Fed funds range at 4.25% to 4.50%.
A quick reminder: a continuing pause in the Fed’s rate cut plan today was expected, and that was already baked into term (fixed mortgage) rates. But any “new” news from Chair Powell’s press conference could still result in term rate changes.
The Fed is navigating between the “soft” consumer sentiment survey data of current expectations reacting to the deportations and tariff wars that are trending weaker, and hard data economic measurements of the economy and employment, which have remained firm. Not to mention the pressure to immediately cut the Fed funds rate coming from the administration.
The challenge for the Fed is reconciling the forward-looking soft data, which is particularly subject to policy unknowns, with the backward-looking hard data that doesn’t yet reflect the measured impact of the administration’s actions. Where the hard data will be in three to six months from now is particularly difficult to project because the degree of the administration’s policy changes is ongoing and without a clear historical precedent. Being a month into the administration’s 90-day pause on reciprocal trade levies only complicates this timing mismatch.
The “new” news today could come from the revisions to the policy statement or from Powell himself at his Q&A session. The last FOMC meeting gave us the first dot plot revisions since the inauguration; the next revisions don’t come until the June 18 meeting. Until then, we can expect the possibility of higher rate volatility to continue as hard data releases fill in the differences between the soft and hard data.
That the bond market volatility has been more subdued in the past two weeks has coincided with the administration dialing back the rhetoric on the trade front. But at the next significant development, we may see bond markets breaking out from current levels.
What’s Next?
At his press conference, expect Powell to be questioned about what additional uncertainty the Fed’s economic projections have incorporated from the administration’s actions and what that greater uncertainty level means for the number and timing of future rate cuts. This guidance will be reconciled with the markets’ evolving (fewer) rate cut projections.
Powell’s guidance on the length of this pause in the Fed’s forward path for rate normalization will again be listened to closely. Changes to expectations of the landing rate and a now slower pace of rate cuts to reach it will set the stage for the market’s interpretation of economic indicators over the next few months.
If the hard data economic indicators continue to show modest impacts from the administration’s actions, more rate cuts and lower rate projections will factor back into rates. That will be a function of inflation measures coming down to 2% and employment trends. To some degree, the level of uncertainty will control how quickly that will be seen in mortgage rate sheets.
What Do Borrowers Do Now?
Originators should explain to borrowers looking to finance the purchase of a home that even as rates are still expected to fall over time, the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty within a typical rate lock period.
The available housing inventory remains 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 possible market volatility that could upend those plans.
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