The Fed minutes this month has markets abuzz that an interest rate hike may be coming this spring. I think it’s a real possibility, too.
Now, on the surface, this may seem to indicate mortgage interest rates are headed higher. But I’m optimistic rates won’t jump as high as some people expect. I’m forecasting in line with the Mortgage Bankers Association that rates stay below 5 percent this year, at about 4.75 percent.
That’s an increase — certainly from the lows from last summer and fall — but still keeps us in a low-rate environment that’s healthy for home-buying.
Let’s break down the Fed minutes and take a closer look at what the Fed is telling us.
It’s all in the minutes
All of the regional Reserve Bank presidents, including those who are not voting members, attend the Federal Reserve Open Market Committee (FOMC) meetings, participate in the discussions, and contribute to the assessment of the economy and policy options. The FOMC schedules eight meetings per year, one about every six weeks or so.
It’s prestigious company with some top economic voices from across the country weighing in on the discussion. While there are no cameras or media allowed inside, each month the minutes of these meetings are released to the public. Wall Street tries to read between the lines of the discussion to predict the Fed’s next moves. Slight changes in wording from month-to-month is often taken as a sign of the committee shifting its position.
February’s minutes, released this week, have the investor community believing the Fed’s next rate hike could be soon. Some say March is a real possibility. Remember, the Fed kept rates near zero since 2008, before raising the target 25 basis points at the end of 2015 and again in December. Analysts expect up to three hikes this year as the Fed tries to move monetary policy back to normal.
Minutes from the Jan. 31 to Feb. 1 meeting said a rate hike could happen “fairly soon,” supported by an increased likelihood that President Trump will spend more and tax less than what we’ve seen in recent years.
Still, policy makers were keeping their options open as to how Trump’s policies will impact the economy, according to the minutes. The committee discussed how Trump’s plans could lead to even lower unemployment and increasing inflation, which would prompt rate hikes. However, a strong dollar from his policies may slow growth and keep the need for rate hikes smaller.
On a side note, Treasury Secretary Steven Mnuchin said Thursday the Trump administration is committed to major tax reform legislation by August, adding that tax reform is the top economic priority. He predicted President Trump’s economic proposals will push economic growth rates above 3 percent.
The Fed minutes this week also showed some committee members were concerned markets had priced equities too high if Trumponomics doesn’t unfold as expected. The committee also questioned if markets truly believed rate hikes were coming this year.
Add up all that sentiment and it does seem to suggest the next rate hike is not far away. So why is March on everyone’s mind? The Fed will receive reports on inflation and employment before its March meeting. So data will be in place for them to make solid judgements. Fed Chair Janet Yellen will also hold a press conference after the March meeting, and historically rate hikes have often taken place on months when the Fed chair meets the press.
Do I think a rate hike will happen in March? It’s impossible to predict. The markets have it priced at about a 40 percent chance. I think that’s fair. If we see really strong jobs numbers next week, the percentage will increase.
What does this mean for the mortgage market?
I think you can take a deep breath and expect mortgage interest rates to trail other increases. Why is that?
Historically, mortgage rates tend to follow the moves of the yield on the 10-Year US Treasury. However, lately we have seen Treasury yields increase at a faster pace than mortgage rates.
This tends to happen in a rising rate environment like we see today, as the likelihood of mortgage refinancing and prepayments is greatly reduced. As a result, spreads on mortgage derivatives tighten and mortgage rates start to increase at a slower pace than the market overall. The result? Mortgage rates that don’t rise nearly as fast as the 10-Year Treasury.
For this reason, I think the MBA is accurate in its forecast of 4.75 percent 30-year fixed rates this year.
I do continue to believe this year will be a volatile period for the markets. So we may bounce around some, especially as new federal policies are debated and implemented. Rather than fretting about a sudden surge in rates, I recommend focusing on good communication with borrowers to make sure loans are locked in a timely manner and to help them understand why these rates are still well below average.