So the Federal Reserve policy meeting wrapped up on Wednesday and they announced no change to current interest rate policy. However it appears that the markets and the public at large are now excited that rate cuts and by extension, lower mortgage rates are coming in the near future. I hate to rain on a parade but that’s not a thing, let me tell you why.
Before I do, let me remind you the the Fed is in charge of the overnight lending rate. It’s literally the shortest rate in the market. Overnight. It’s the rates that giant corporate banks, think Chase, Citibank, Bank of America use when they have cash flow deficits with each other “overnight” in the banking system. The Fed sets that rate and sometimes its a proxy for other rates in the market.
However, mortgage rates are controlled by the bond market. Specifically, the market for Mortgage Backed Securities (MBS). This is literally the longest rate available to consumers in the market, the 30 year fixed rate mortgage. Bond traders go to work every day and their work results in a rate that can sometimes be in line with the Fed decision, but not always. After the Fed announcement and Mr. Powell’s press conference this week, the MBS market has improved, mildly at best. The market is generally unimpressed.
Why this tepid reaction? Two reasons, really. First is the idea that these three rates cuts come not directly from the Fed but by interpretation of the dot plot. The dot plot has become all the rage the last few years as market watchers think it predicts the future. But really it is a forecasting tool that is subject to changes in the economy down the road. Second is that Chairman Powell literally said we could have rates cuts “as long as the data cooperate”. So ultimately bond market reaction is limited because future data on the slowing economy can only by definition, come later!
Add to this the following: Is there really a place where you think inflation is slowing down, much less falling? I’ll hang up and listen for my answer. Really, if you think so, you are fooling yourself. The Fed themselves in their statement said, we are looking for cracks in the Labor Market and don’t see any. Inflation in both products and services is still high. Have you priced insurance lately? Car prices are stubbornly high, both new and used. Housing prices aren’t coming down, part of that is a function of inventory, but can you point out anywhere prices are falling?
We won’t get meaningful rate cuts that impact mortgage rates until we go MONTHS without observing inflation and it recedes from our day to day consciousness. Even if the Fed ends up cutting rates due to a political agenda, the bond market will see right through that and leave mortgage rates right where they are. In fact, rates cuts by the Fed that are not warranted by the data could drive mortgage rates up!
Higher for Longer. Make sure you are OK with your mortgage rate and payment in today’s market because the people who told folks to marry the house and date the rate a couple of years ago got them into a situationship…
