The Federal Reserve met this week and reaffirmed rate cuts are coming but, how many and why? Let’s discuss what happened and look into the week ahead.
“Communication breakdown, it’s always the same Havin’ a nervous breakdown, a-drive me insane”…Communication Breakdown by Led Zeppelin
Mixed Fed Messages
On Wednesday, the Federal Reserve met and decided to once again pause and not cut rates. This was widely expected, as inflation has been reported higher than expected of late. It wasn’t the lack of action which moved the markets, but the forecast The Fed provided in their statement which helped both stocks and rates improve.
Fed’s Forecast
Every three months, the Federal Reserve issues their economic forecasts. This is where they adjust their outlook on the economy, unemployment, inflation, and the path for interest rates. So, what is the Fed thinking?
The Fed now sees economic growth stronger than expected, which is a good thing, and it removes the near-term threat of a recession. They also believe unemployment will come in lower than previously forecasted and inflation will also come in higher than forecasted.
The head scratcher in all of this is that despite the Fed seeing stronger growth, less unemployment, and more inflation, they held their forecast to cut rates three times this year.
With just 6 Fed meetings remaining in 2024, it means rate cuts are coming soon. How soon? The financial markets are pricing the first rate cut in June with a current probability of near 75%. This will of course change as economic readings are reported.
Slowing the QT
In a measure that may help interest rates improve down the road, the Federal Reserve said they are going to start slowing their balance sheet reduction, quantitative tightening (QT), very soon. Part of the upward pressure on long-term interest rates the past couple of years has been QT. So, less QT, could be a good thing.
The Market Reaction
Interest rates improved modestly, and stocks hit all-time highs once again. You can see the chart of mortgage-backed securities below which highlights the nice price gains and rate declines this week.
4.35%
The 10-year Note moves up and down with mortgage rates and it is easy to follow. Watch 4.35%. If rates move above this level, they will be going higher still. The good news? As of press time, rates remain beneath that level.
Bottom line: Rates have improved this week and after the Fed’s call for cuts, therefore we should expect lower rates ahead.
Economic Calendar
Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.
If you look at the right side of the chart, you can see prices rising, meaning lower rates.
Chart: Fannie Mae Mortgage Bond (Friday March 22, 2024)
Economic Calendar for the Week of March 25 – 29
