Fed weighs strategy ahead of September meeting - Movement Mortgage Blog

The minutes from the latest Federal Open Market Committee meeting pushed government bond yields lower over the last week as it was revealed FOMC members are in favor of a more “restrictive stance of policy.” The Fed instituted a second consecutive 75 basis point rate hike in July in its efforts to cool rampant inflation. The minutes said the restrictive policy “was required to meet the Committee’s legislative mandate to promote maximum employment and price stability.” The FOMC does not meet in August and will meet again at its annual retreat in Jackson Hole, Wyoming in September.

The minutes did not reveal any prescriptive deciding factors about rate increases and instead reiterated a stance the Fed held throughout COVID which is to watch the data closely before choosing a path. Currently, markets are pricing in a 50 basis point hike for September. One segment from the minutes that helped rally markets stated, “Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.”

The 10-year Treasury note yield moved slightly lower after the minutes were released but has been trending upward since its low of 2.64% on July 29. The 10-year yield is typically a predictor of the movement in mortgage interest rates and over the last two months has been extremely volatile. The yield peaked on June 14 at 3.48%; just a few months earlier, on March 4, the yield was less than half that at 1.72%. 

The tighter monetary policy is rippling through the housing market by way of new home construction. There is already a massive inventory problem which is a big part of why home prices skyrocketed like they did. Now, the National Association of Homebuilders (NAHB) says higher costs are crushing their previously positive outlook. The NAHB/Wells Fargo Housing Market Index fell below 50 points down to 49 in its last survey. Anything below 50 is considered negative. The index was briefly in negative territory at the very beginning of the COVID pandemic but prior to that it hadn’t hit a negative reading since June 2014.

Builders have consistently been facing increased costs for materials, labor and land for building due to massive supply chain issues due to the pandemic—but they still had rabid demand. Now that interest rates have shot up above 5-6% for many borrowers, builders have seen a distinct dropoff in demand. The NAHB August survey indicated that 1 in 5 builders lowered home prices to increase sales and decrease cancellations.

Slowing demand is being felt across the board in the mortgage industry, not just in new construction. The Mortgage Bankers Association weekly Market Composite Index showed refinance application volume was 82% lower year-over-year with purchase application volume 18% lower. Joel Kan, the MBA’s Associate Vice President of Economic and Industry Forecasting said in a release that applications hit their lowest level in 22 years citing affordability and a gloomy economic outlook as reasons behind the decline. Kan added, “However, if home price growth slows more significantly and mortgage rates move lower, we might see some purchase activity return later in the year.”

Rates remained relatively flat according to the latest Freddie Mac 30-year fixed-rate mortgage average. The 5.13% average was almost a full tenth of a point lower than the week prior. Freddie Mac’s economists note that while inflation seemingly being past its peak has stopped the rapid rise of rates, the issues that compounded over the last year continue to wear on the market. Freddie Mac’s release states, “The market continues to absorb the cumulative impact of the large price and rate increases that led to a plunge in affordability. As a result, over the rest of the year purchase demand likely will continue to drag, supply will modestly increase, and home price growth will decelerate.”

If you are a potential homebuyer, one key thing to remember about volatile market times like this is that it’s more important than ever to keep in close touch with your Movement Mortgage loan officer. You take a risk by waiting around to see where the market will move before you lock in an interest rate. Make sure you are aware of all the possible outcomes before deciding to wait it out and hope that rates move down.

About the Author:

Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.