10-19-18 Fed Scares Market–Rates Up
Question of the week: No question this week as travelling to Boston to see our daughter.
Have a question? Ask me!
The October 5th Weekly Rate & Market Update question of the week was “How does the Federal Reserve impact mortgage rates?” In the answer I discussed how comments made by members of the Federal Reserve Open Market Committee (FOMC) as recorded in their minutes have a tremendous impact on mortgage rates as investors read the comments and then react based on what they think the Fed will do in the future, encourage higher rates, lower rates, make no moves? This commentary by me two weeks ago was proved on Wednesday when the minutes from the September meeting of the FOMC were released.
Several members of the committee expressed that rates would need to continue to rise until they were restrictive on the economy and able to slow growing inflation pressure. There were no quantitative dates as to how long rates should rise, nor how much. There did appear to be consensus that the Fed would raise its funds rate again in December, expectations are for another one-quarter of one percent (0.25%). Gleamed from the minutes was that instead of the previously expected one more rate hike in 2019 it seems the FOMC is looking at three more rate hikes next year.
Reading the minutes regarding concerns about inflation, tighter labor markets driving up costs as well and need to make sure economy does not get too hot to push inflation too far above the Fed’s target rate of 2% annual inflation, investors began selling off in the bond markets, for reasons mentioned in the October 5th WR&MU—they do not want to get caught with an investment that will be dropping in price, the Fed minutes indicated higher rates, therefore lower prices on their bond investments.
The most basic rule of economics is the greater the demand the greater the cost, the greater the supply the lower the cost. When more people are selling a product or service than there are willing buyers the price of that product or service drops. In the bond, and mortgage, markets when the price drops rates rise. With the large sell off in the rate markets on Wednesday rates rose.
The market reacted instantly to the Fed, just as expected and discussed in the WR&MU two weeks ago. The reaction was to essentially price in three rate hikes for the Fed, one in December and two by June 2019.
Rates for Friday October 19, 2018: With the sell-off in bond and mortgage markets on Wednesday it is no surprise that rates are a bit higher this week after dipping last week. Investors are looking for any reason to support their feeling the Fed has at least three-quarters of a percent (0.75%) in rate hikes coming in the next eight months. Unless the economic data shows a slow-down in the economy or inflation breaking below 2% and lingering, there is little expectation for lower mortgage rates in the future based on the economy.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 4.875% Up 0.125%
30 year high-balance conforming 5.125% Up 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Leslie and I are visiting our oldest this weekend. She is a freshman at Boston University and it will be good to see her and her digs in a dorm tower high above Commonwealth Avenue. When she and I were texting last week I said, “you need a hug from Mom.” “Yeah.”
I then said, “I need one from you.” “I know.” I am a hugger, thankfully I have two daughters who are probably a bit more receptive than if I had two teenage boys, a bit.
Have a great week,
Dennis
You can find past Weekly Rate & Market Updates on my website at www.DennisCSmith.com/My-Blog
