Hello everyone. Welcome back to the Mortgage Rundown. Today we are going to talk about what’s happening with the Federal Reserve.
If you were somewhat confused by the sudden drop in interest rates this past week after the Fed raised their benchmark rate, you are not alone. The FOMC somewhat shocked the world last week, not because they raised interest rates by 75bps in the last meeting, but it was their language that caused a sudden drop in long-term rates and a large stock market rally.
As you can see from the chart below, the 10yr Treasury has been coming down since its peak in mid-June and then dropped much further last week. The FOMC’s language last week indicated that the benchmark rate was at its neutral level, which is the level the Fed expects it to be at in the long run. They also indicated that they would do what was necessary to prevent a recession.
That was very confusing to the market who interpreted this as a policy shift from the Fed, from raising rates to a sudden possibility that they could be lowering rates very soon. Now, thankfully over the course of the past couple of days, the Fed has clarified that they expect to continue to battle inflation, which is the greater threat, with the expectation that the Fed lowers rates 50bps in September, followed by another 25bps in November and December.
What is interesting is that the market is pricing in the FOMC lowering rates sometime around July to September of 2023. The market is very concerned about inflation in the very short term, but also very concerned about growth in the medium to long term.
Also, something to keep in mind is that 75bps rate hikes by the FOMC are not very common historically. The last time they raised rates 75bps in a single meeting was almost 30 years ago. The Fed tries to direct the market when they expect to raise 25bps, and this year we have had a 25bps move, a 50bps move, and two 75bps moves.
Why the market thinks the Fed was shifting gears at the same time they were making record rate moves is beyond me, but as the Fed starts to move away from these huge hikes, we should expect more market volatility.
That’s it everyone from the capital markets desk this week. Thank you all for watching and have a great day.