Question of the week: What is impact of the Federal Reserve cutting rates?
Answer: In normal times…the Fed will generally signal in advance its general direction and timing on when it will move its discount rate (rate it charges banks to borrow from the Fed). Because of this the markets, stock and fixed-rate (bonds and mortgages) will react accordingly in advance of any rate announcement. When the rate change is announced it often results in interest rates for mortgages to move in the opposite direction—contrary to what one would think would happen.
For instance, in 2017 the Fed kept stating it would be raising rates through 2018. Not only that it would raise rates but when and by how much. Investors reacted accordingly, knowing the rate changes were coming, so when the Fed did raise rates as expected there was little to no change in mortgage rates or other markets. Mortgage rates climbed through 2018 as the Fed kept increasing its rates and economic news was positive. Before the final Fed rate increase in 2018 rates began to drop, partially on economic data and partially because the Fed was announcing only one more rate increase in December and then no plan to change rates in 2019. Investors were reaction was to the unlikeliness that rates would go up again in the near future, and because they would not go up they could go down. Their reaction was a cause for rates to drop into the summer of last year.
That was normal behavior by the Fed and the markets. As a rule, the Fed does not like to surprise markets with unannounced rate cuts as the result could be over-buying and over-selling in either stock or fixed rate markets.
The Fed announcement of a rate cut earlier this week was a surprise. Not only that the rate cut was made without their being a meeting of the Federal Open Market Committee (who makes the rate decisions), but that the rate was not changed in the normal 0.25% (one-quarter of one-percent, or twenty-five cents on one hundred dollars), but was dropped one-half of one percent (0.50%).
The double surprise of the rate cut and the size of the rate cut sent investors scurrying to cover their ass-ets. They sold off on stocks, causing equity markets to drop; and purchased bonds and mortgages causing rates to drop. Some felt there was over-buying and selling and reversed directions, causing stocks and rates to climb. Then they changed direction again…Through the week the daily changes in markets have had wild swings up and down. Exactly the type of behavior the Fed is concerned about if an unannounced rate change is made, and why future rate changes are either announced or strongly hinted at so investors and markets are prepared.
Overall, the impact on mortgage rates has been positive with rates slipping through the week for most products. Note however, that the decline has as much to do with the reason the Fed suddenly lowered rates as the actual action by the Fed.
Concerned about the impact of Covid-19 (aka coronavirus) on the economy, the Fed slashed rates in the same manner it would to stave off a recession. As we saw in the last few weeks, investors were expressing their concern about the economic impact of the virus and its spread by selling off stocks and equities cause large drops in those markets. The Fed was trying to bolster markets with its cuts and try to bring some confidence to markets.
Ordinarily, Fed rate cuts do not have an immediate impact on mortgage rates. This week, by making an unannounced rate cut that is twice the amount the Fed typically moves rates, the Fed’s actions has impacted rates.
For those interested here is Weekly Rate & Market Update from October 2018 “How Does the Federal Reserve Impact Mortgage Rates” that goes into much more detail on the Fed, how it works and impacts rates and markets.
Have a question? Ask me!
Workers continue to gain. The Labor Department released job data for February this morning, and it was all positive. The economy added 273,000 jobs in the month, well ahead of the consensus estimate of 165,000 additions. After slipping up to 3.6% in January, the unemployment rate slipped back down to its 50 year low of 3.5% in the month. Average wages also continue to grow, with 0.3% gain February; wage gains continue to outpace inflation. The news would normally be mortgage rate unfriendly and lead to speculation of the Fed increasing rates due to the continual strength of the job markets, however the global concern over the Covid-19 outbreaks wipes out any positive economic news as it pertains to rates and markets.
Rates for Friday March 6, 2020: Rates continue to decline as the concern over Covid-19 still have impact on investors. On our side of the industry we are seeing a very interesting phenomenon, one I cannot remember the last time I have seen this. On any given day, for a particular rate we can see a spread between five or six lenders of up to a point and a half (1.5%) in fee. For instance, if you have a $500,000 mortgage, when we look at a rate at 3.00%, the cost for the mortgage that we pay the lender can vary from no cost to as much as a cost, to us, of one and a half percent—which would equate to $7500; again that is the cost we would pay.
Lenders are shifting their costs dramatically from day to day in order to control the number of mortgages being submitted for underwriting and funding as the volumes being generated by the lower rates are stressing every point of the mortgage process. As mentioned above, the labor markets are very tight so hiring to help with load management is extremely hard, and there is the issue if a lender staffs up for the current volume, will the volume still be consistent by the time new workers are trained and fully functional?
Different products have also seen large swings in variances. For instance, while 30 year mortgage rates have dropped, 15 year mortgage rates have been fairly constant with some slight dips.
All that said, we have lenders this week presenting us with rates that are a bit lower than last Friday. For the first-time in a long time I have had to alter the rate chart below as we reached the bottom rate on the Y-axis.
How long with this last? It depends on when investors feel confident in the impact of the Covid-19 virus, which means when governments and those who spread the news of every new case being diagnosed feel the spread is somewhat under control or not as big of a threat. Once that happens we should expect a very large reversal in investors behavior causing equity prices and interest rates to climb—likely very rapidly.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.00% Down 0.125%
30 year high-balance conforming 3.125% Down 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.
Thank you to everyone who reached out to me after last week’s two pieces of commentary on my views regarding the Covid-19 reporting and reactions and elections and the media. I enjoyed hearing from some long-time clients and WR&MU readers and engaging in conversations on those subjects and more.
Don’t forget to push your clocks ahead an hour when you go to bed Saturday night—if you still have any clocks that do not set automatically. I will spare you my thoughts on moving the clocks twice a year, except to say I favor picking one standard and sticking with it. Here is a link to some interesting facts about daylight saving time, eight quick items, that I found interesting.
Have a great week,
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog