Housing News

Is the Fed Flying Blind as It Lowers Interest Rates?

Hello everyone. Welcome back to the Mortgage Rundown. We are going to talk about what’s happening with interest rates.

It was a big day for the markets. The Federal Reserve, in a widely expected move, lowered interest rates on Oct. 29 by a quarter of a percentage point. The overnight target rate is now in the range of 3.75 to 4.0%.

This is the second time this year that the Fed has lowered rates. The Fed appeared poised to lower rates again at their next and last meeting in December.

Another big announcement yesterday was that they have decided to pause QT in December. That is quantitative tightening. QT is essentially the mechanism where the Fed is shrinking their balance sheet, which is ultimately the Fed’s goal.

The Fed grew the balance sheet quite aggressively during COVID-19. Since 2023, it has sought to bring that balance sheet back to a more reasonable level.

However, thanks to its latest move, lowering the benchmark rate and stopping the balance sheet runoff, the Fed is essentially backstopping support for the U.S. Treasury and mortgage-backed securities markets. This will be very positive for mortgage rates going forward.

One of the big challenges for the Fed is the government shutdown and the lack of economic data related to the jobs market and inflation. This is going to add yet another layer of difficulty and uncertainty for the Fed in terms of guiding interest rate policy effectively to support the economy and control inflation.

It doesn’t appear that the shutdown will end anytime soon. Ultimately, that could create a lot of volatility for the market. So, don’t be surprised if we suddenly see large moves daily in interest rates as the market grows increasingly uncomfortable with the lack of transparency and the uncertainty created when there is no concrete economic data to assess the economy.

That’s it for everyone from the Capital Markets Desk. Have a great day.