In the just-released FOMC statement, the Fed raised the Fed funds rate by 0.25%. This increases Fed funds to a range of 3.75% to 4.00%. After last Friday’s inflation numbers and Fed Chairman Warsh’s Jackson Hole speech in August, this was widely expected by the market.
This breaks the streak of five consecutive FOMC meetings with no rate changes. There is a refresh of dot plot projections today (which will inform us about the Fed’s future rate hike expectations, although Warsh is not expected to participate in that). The market will focus on the dot plots relative to its current forecast for additional rate hikes in October and December.
As far as future rate actions go, the market is operating in a still relatively new environment of less forward guidance from the Fed. Warsh has emphasized the Fed’s inflation mandate and 2% target over the full employment mandate and that it will go by what the data shows. The continuing strength of the employment numbers allows him to do so. For now.
What’s Next?
Markets will adjust to the dot plots and focus on Warsh’s press conference. The market continues to look for how Warsh plans to reduce the transparency of forward guidance, updates on the task forces he created, as well as plans to shrink the Fed’s balance sheet.
The recent market selling of bonds and Treasury auctions have term rates at their highest levels in years. That move happened quickly, and the economy will take time to adjust to these levels.
The geopolitical situation in the Middle East and the upcoming mid-term elections have ramifications for how the market will trade over the next few weeks. The primary factor for rate expectations will remain the inflation measures unless something significant changes with those. Obviously, the most impactful factor is the price of oil in the global economy, and that’s directly linked to the war with Iran.
What Do Borrowers Do Now?
Originators should explain to borrowers looking to finance the purchase of a home that — even as term rates continue to move higher, and despite increases in available inventory — there remains a systemic shortage of homes that will take years to address. Finding a home and financing that purchase now still starts the opportunity to build equity. And building equity still outweighs the cost of current financing.
With the news cycle centered on the Middle East and oil prices, and with mid-term elections gaining attention, the current mortgage rate market may continue to move higher over the intermediate term. Sellers can offer to pay discount points, and originators can offer temporary buydowns for borrowers who have a purchase transaction opportunity.
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