Fed won't raise rates yet, but hike could come later this year

by Ryan Smith29 Apr 2015
The Federal Reserve’s soft outlook on rate hikes today means business as usual in the mortgage bond market, according to Bryan McNee, vice president and senior bond analyst for MBSAuthority.com.

The Fed today said that with the housing recovery remaining slow and inflation running below its long-term objective, its current 0-one-quarter-percent target range for federal interest rates was still appropriate.

“The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term,” the Fed’s Open Market Committee wrote in a press release.

McNee said that the Fed will probably still raise rates sometime this year.

“The bond market already says the Fed is going to raise interest rates this year. It’s the people in the stock market who don’t think rates are going to rise,” McNee said. “But the bond market has very clearly got a bet that we’re going to see something around September.”

The Fed didn’t specify when rates would rise, however, meaning most bond traders will continue to prepare for a rate hike, McNee said. And since that rate hike is expected, it won’t have a catastrophic effect on mortgage rates.

“It’s not going to be a crazy shift if they do it, because some of it is already in pricing,” McNee said. “There’s no doomsday scenario here. Worst case scenario, it would cause us to move off of some of the best rates we’ve seen this year.”

The Fed’s soft stance on rates may not have come as a surprise to bond traders, but many took precautions prior to the agency’s statement, selling off mortgage-backed securities Monday and Tuesday in anticipation of a more hawkish stance.

“Yesterday, Fannie Mae mortgage-backed security benchmark coupons sold off 49 basis points,” McNee said. That’s a pretty big move lower.”

It’s especially unusual considering the relatively weak recent economic reports, he said.

“Rates usually get a little better on a weak economic basis. But the mortgage-backed securities market shrugged (the reports) off and lost almost 50 points. Mortgage-backed securities traders were taking some money out of the game because they were nervous about the Fed meeting.”
 

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