What to expect from today’s Fed announcement

by David Kitai27 Jan 2021

Federal Reserve Chairman Jerome Powell will announce the results of the Fed’s monthly meeting later today. The Fed has been relatively explicit about maintaining an accommodative monetary policy through the pandemic and economic recovery. However, some question marks have emerged in the last month around inflation, President Biden’s promised stimulus package, and noise from Fed policymakers about slowing quantitative easing measures. So what could today’s announcement mean for mortgage rates?

Economists and analysts interviewed by MPA all broadly agreed in predicting that the Fed will keep its key interest rates steady and take steps to reassure markets that it will stay committed to quantitative easing. They predicted that Powell will reemphasize Fed’s inflation position, giving it some room to run while unemployment remains so high. They also highlighted where mortgage professionals should be looking to see if this announcement will have any material impacts on how they do business.

“We’re not expecting any fireworks from the Fed in the near term,” said Prajakta Bhide (pictured), US strategist at MacroResearchBoard (MRB) Partners. “We do expect Powell to acknowledge the better growth outlook based on higher odds of fiscal policy and, more importantly, the fact that US vaccinations have picked up. The optimism regarding the future is something Powell will address, but he also has to balance that by addressing weaker data in Q4, especially when it comes to the labor market and consumption.”

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Bhide said that Powell will have to directly and strongly address the chatter around tapering that’s emerged in recent weeks. As we learned in the Taper Tantrum of 2013, miscommunication by the Fed can cause rate spikes and interruptions in this accommodative policy. Bhide believes, however, that Powell has become a seasoned operator at his Press conferences and should be able to adeptly address these issues.

In addition, Bhide expects that tapering and inflation won’t manifest this year. Rather, she expects those to be mostly 2022 stories. However, she does expect that later in the year, when vaccine uptake is more widespread and consumer confidence rebounds, there could be spending spikes in sectors like travel and entertainment that could create more meaningful, albeit temporary, upward pressure in consumer prices. She expects that the Fed will have to step in and address that particular issue.

As for the housing and mortgage markets, Bhide believes housing fundamentals are in very good shape and even if interest rates tick up slightly from their current levels, they will remain very, very low. She expects that people with financial security will be very likely to explore the housing market in the coming months.

Meanwhile, Odeta Kushi, deputy chief economist at First American, agreed with Bhide on what the Fed is likely to do, and what low interest rates will continue to mean for the housing market.

“For housing, all eyes are on mortgage rates,” Kushi said. “Recently, the yield on the 10-year Treasury increased due to stronger investor confidence. As a result, mortgage rates rose slightly. While mortgage rates may rise as bond yields increase, by any historic standard mortgage rates will remain low in 2021. Low mortgage rates will continue to boost house-buying power and keep purchase demand robust.”

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Bhide emphasized the importance of communication in the lead up to, and aftermath of, the announcement. She noted how spooked investors can be by mixed signals from the Fed and stressed that for any mortgage pros watching the announcement, Powell’s response to rumors of tapering will prove a key indicator of how stable this low-rate environment will remain.

“I’d be looking for any changes on the thinking around tapering, and how the Fed expects to deal with it,” Bhide said. “I was a little concerned when you got the sudden chatter around tapering so soon into the recovery, but that’s what you get when you have a very diverse set of people voting in the FOMC. That injects a little bit of noise. I would look for Powell to take control, streamline the narrative, and explain the consensus Fed view a little bit more.”