Epic Fed Needle Threading leaves rates relatively unchanged

Mortgage rates were surprisingly stable today as the bond market reacted to a new Fed policy announcement. Maybe “reacted” is the wrong word given the market response. Specifically, the bond market (which dictates interest rates on mortgages and beyond) was hard to distinguish from most other random trading days. It is simply impressive considering what has happened.

So, what happened? It does require a bit of background, but let’s do it quickly.

  • The Fed is currently buying $ 120 billion / month in new Treasuries and MBSs. These purchases greatly contribute to the low rate environment for mortgages.
  • The Fed has done this intermittently in the past since 2009.
  • 2013 was the first major example of the Fed “scaling back” its monthly bond purchases after a long period of accommodation. Markets panicked and rates climbed at the fastest rate in years.
  • The end of 2021 is well known as the second major example of a Fed cut, and markets are speculating on when this would become official.

Today’s announcement brought forward verbiage that suggests the Fed will start cutting monetary policy at the next policy meeting in November. Then, in the press conference following the meeting, Fed Chairman Powell frankly and explicitly confirmed that the Fed does indeed consider announcing the cut plan at the next meeting, unless the next jobs report is surprisingly bad.

Definitely proven links some volatility during today’s Fed events, but again, that volatility existed within a perfectly normal range. The lack of greater market reaction is a testament to the Fed’s transparency efforts. In short, they ended up saying almost exactly what they wired over the last month of speeches, and the markets turned out to be positioned for an “as expected” outcome. So not only was the Fed transparent, but the markets were betting fully on this transparency as well. Compared to some of the drama of 2013, today stood a perfectly threaded needle of epic proportions.

What does this mean for mortgage rates? Today? Nothing really. Lenders have barely budged since yesterday.

All of the above being said, sometimes it takes a few days for the post-Fed rate dynamic to really kick in. Additionally, we expect that some of today’s potential impacts will instead be seen in the wake of the upcoming jobs report on October 8.

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