In the just-released FOMC statement, the Fed announced no change in the Fed funds rate. The rate cut campaign remains on hold for a sixth consecutive meeting, and this keeps the Fed funds range at 4.25% to 4.50%.
Despite the Administration’s very public pressure on Chair Powell to cut the Fed Funds rate immediately, a continuing pause was expected and already baked into term (fixed mortgage) rates. Today’s focus is on whether Powell’s press conference reveals any change to the Fed’s wait-and-see guidance regarding the tariff-inflation evolution or what might be seen as capitulation to the Administration’s pressure (coming in the form of one or more dissents from the consensus decision). A change in guidance in either of those directions could still result in term rate changes today.
Additionally, expect Powell to field questions about any dissent at his press conference. It is expected there may be two dissents. For context, there hasn’t been more than one dissent to a policy decision for more than 30 years — that’s going back 259 policy meetings! If there are two, the likely dissenters are expected to be governors Bowman and Waller, both Trump appointees.
As important for the markets going forward will be the growing spread between voters’ opinions about not cutting today, expectations to cut at the September meeting, or even remaining on hold past September. If there are two dissents calling for a rate cut today, that can only fan the political flames from the Administration. On the other hand, a unanimous decision today (unexpected) would send a strong message that Powell has a unified front behind his personal guidance.
The Fed members’ dot plot projections were released at last month’s FOMC meeting. They don’t release the next revisions until the September 17 meeting, making today one of the “in-between” meetings where official guidance consists of (only) the policy statement revisions and Powell’s press conference. Without that evidence of diverging projections, expect sharp questions directed at Powell to better understand how the September decision may unfold. Until then, it will be a long and winding road of tariff news and fresh inflation and employment data for markets to interpret.
With the possible dissents, it’s likely Powell will again be asked multiple questions about the pressure from the Administration. I expect this questioning to focus on how that pressure may translate to the eventual resumption of rate normalization (when rate cuts resume) and where the Fed funds rate eventually finds a neutral landing point.
What’s Next?
Leading up to today, the bond markets have settled into a range that implies traders and investors are comfortable with current bond trading levels until they have fresh information or guidance. Bond market volatility has subsided; it may not remain so.
The tariff war continues to evolve as the Administration has reached deals with several but not all the significant trading partners (countries). Despite that, even the inked tariff deals contain heightened tariff levels, and those have yet to fully work their way into inflation readings. And there remains a deal to be reached with China.
The jobs market is still growing and showing resilience to the inflation outlook, but at a slower pace. That leaves the evolution of inflation and U.S. Treasury bond auction levels as the immediate primary drivers of uncertainty for both the Fed and rate markets. We can expect this uncertainty to influence day-to-day rate movement. Watch for volatility levels to rise as publication of inflation and economic indicator readings are announced, the further into summer we go, leading up to the September 17 FOMC decision. That will make rate lock decisions more difficult.
It's these crosscurrents that have fogged forward expectations for rate declines. Both in degree and timing. If employment softens at an increasing pace and the hard data economic indicators continue to show modest inflation impacts from the new tariffs, the likelihood of falling rates and a September rate cut will materially increase. Without both of these developing, expect a greater likelihood the Fed remains on hold.
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 that can increase volatility within the typical rate lock period.
Certain local markets have seen declines in value, but once rates start back down, that dynamic will change. And despite increases in available inventory, relative to the longer-term need for housing, there will remain a shortage of homes for years to come.
A borrower isn’t looking to purchase a market trend or an inventory level. At a point in time, they are looking for a home that will meet their needs now and far into the future. 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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