MND: Fed Hikes Rates; Rates Drop Sharply. Here's How That Works

[Robin Simon]

Good Recap by Mortgage News Daily on yesterdays FOMC and ensuing reaction of mortgage rates

https://www.mortgagenewsdaily....

There was some debate as to whether or not the Federal Reserve would hike the Fed Funds Rate today, although the consensus was for a 0.25% increase. That's exactly what the Fed delivered. Additionally, markets were (and still are) betting that the Fed cuts rates by roughly 0.75% by the end of the year, but the Fed's just-released forecasts show zero rate cuts by the end of the year and slightly HIGHER rates by the end of 2024.

Despite all this, Treasury yields (a benchmark for mortgage rates) and mortgage rates themselves fell significantly after the Fed news came out.

Why in the world could that happen?

First off, the Fed Funds Rate is not a mortgage rate, nor does it directly affect mortgage rates by the time the Fed actually hikes or cuts. More importantly, Fed Chair Powell spoke about upcoming tightening of lending conditions due to the recent banking drama. That may seem like a simple enough comment, but it carries a lot of weight in terms of shaping economic momentum.

Lending and credit are critical to growth and inflation. If lending subsides (fewer loan programs or more restrictive requirements to qualify), it puts additional downward pressure on inflation. And inflation is the key reason rates have remained high.

Long story short, in spite of the Fed rate hike and the relatively unchanged outlook for 2024, the market saw some indication of a policy pivot in Powell's comments--some shifting of the big picture cycle of economic growth and inflation. Either that, or Powell's warning on banks caused investors to fear additional banking issues in the days/weeks ahead.

The result was an impressive improvement for the average lender, with 30yr fixed rates dropping nearly a quarter point in many cases. It remains to be seen if this is a temporary sigh of relief or a sign of things to come. That question will likely be determined by data and whether or not we see additional bank drama in the near term future.