Mortgage rates poised to drop after Fed rate hike

Mortgage Bankers Association breathes a collective 'sigh of relief' after Fed move

Mortgage rates poised to drop after Fed rate hike

It looks like the 10th time might be the charm. Mortgage rates are poised to go down as a result of Federal Reserve action on Wednesday raising the interest rate by another 25 basis points – the tenth consecutive hike since March of last year in the quest to tame inflation.

The Fed’s action was widely anticipated as the Fed seeks to bring inflation to 2% from its current 5% level. Other economic metrics are sound, the Federal Open Market Committee said in a prepared statement – economic activity expanded at a modest pace in the first quarter; job gains have been robust in recent months; and the unemployment rate has remained low. But: “Inflation remains elevated,” the committee said in a prepared statement.

“The US banking system is sound and resilient, the Committee statement continued. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

Hence the crusade to bring the inflation rate to the historically pursued 2% level: “The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run,” the statement reads.

“In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5% to 5.25%. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

“In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.”

The Fed’s move bodes well for mortgage rates

While economic uncertainty lingers, the Fed action will have a positive effect on mortgage rates, pundits said. Melissa Cohn, vice president, regional vice president at William Raveis Mortgage expounded on the issue in an interview with Mortgage Professional America.

“This rate hike will cause home equity loans, car loans, student loans, credit card, and margin loan rates to rise yet again – but it doesn’t mean that mortgage rates will follow suit,” she said. “In fact, the bond market ended the day down eight basis points, closing at 3.35%. If the bond market rally holds, then we can expect to see mortgage rates move down.”

Just how far mortgage rates will drop is contingent on other factors, she added. “How far down they will go in the next week or two will be dependent on economic data, including the April jobs report this Friday. If the report matches the ADP advanced report this morning predicting that 290,000 new jobs were created in April instead of the expected 130,000, then the rate rally could be short-lived,” she added, referring to the jobs report produced by the ADP Research Institute in collaboration with the Stanford Digital Economy Lab.

The downward flow of mortgage rates is complicated given the variety of forces currently in play, Cohn noted. “There are so many forces impacting the bond market right now – the debt ceiling, bank failures, and, of course, inflation,” she said. “Until we are past the debt ceiling issue and the banking crisis, it will be harder for rates to truly come down. Don’t get me wrong, mortgage rates will fall this year, but any major changes may get pushed off a few months.”

Fed action comes as a “sigh of relief” to mortgage professionals

Notwithstanding such uncertainty, the Mortgage Bankers Association applauded the Fed move in what amounted to a collective “sigh of relief” among its rank and file comprising more than 60,000 industry professionals.

“Neither a fragile banking sector nor a slowing job market prevented the Federal Reserve from increasing its short-term rate target again today, in line with market expectations,” the MBA’s senior vice president and chief economist Mike Fratantoni (pictured below) said in a prepared statement.

“However, with this increase, we expect this is the peak rate for this cycle, and potential homebuyers and their mortgage lenders may be breathing a sigh of relief. We continue to expect that mortgage rates will drift down over the course of the year as the economy slows, as we move closer to the Fed lowering rates beginning in 2024, and as financial market volatility finally begins to settle down.”

With the latest nominal rate hike, Fratantoni suggested, the Fed is telegraphing it may finally pause on future interest rate increases as it fights inflation: “Although recent speeches by Fed officials had indicated an increasing amount of disagreement regarding the next steps for policy, this was another unanimous vote,” he said.

“We expect that the Fed will be ‘data dependent,’ and certainly would react to any renewed increase in inflation, but today’s statement is consistent with a plan to pause rates at this level.  Inflation is likely to trend down over the course of the year, particularly as weakness in the rental market begins to be reflected in the inflation numbers.”

The housing sector continues to play a central role in the real-life drama pitting the protagonist Federal Reserve System against its inflation foe: “In the near term, tighter credit conditions will slow the pace of economic activity,” Fratantoni said. “The housing sector is already operating under tight credit, so we don’t expect this headwind to outweigh the benefits from somewhat lower mortgage rates. The housing market is likely pulling the economy out of this slowdown, as it typically does.”

And yet, a happy ending – one with ample single-family homes ready to be moved into dotting the landscape – may be elusive as the plot continues to unfold: “While lower mortgage rates will help with affordability, they won’t solve for the lack of inventory on the market, particularly of existing homes,” the economist noted. “This lack of supply will continue to be the primary constraint on home sales through 2023.”

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