Recapping Today’s Fed Minutes
Today’s minutes from January’s Federal Reserve Open Markets Committee (FOMC) meeting did little to further explain the Fed’s dovish flip last month. In response to the Fed’s dovish tone earlier this year, interest rates on 30-year mortgages fell by nearly 50 basis points or 0.5 percent. Earlier today, markets had braced themselves for the possibility that the Fed minutes would divulge deeper fears regarding the global economic slowdown seeping in to the U.S. economy. The Fed did not deliver. Most of the items noted in the Fed minutes centered around their concerns about soft inflation. Previous concerns over “tighter financial conditions” (stock volatility) and the government shutdown have eased. Remember, a dovish Fed is characterized by policy meant to stimulate growth in the economy; this is generally accomplished by lowering interest rates (or halting rate hikes in the current scenario). A hawkish Fed, is one that uses policy to cool off economic growth and contain inflation—usually accomplished by raising interest rates. Though the minutes showed a less dovish Fed than the interest markets wished for, the concerns over soft inflation still validate the pause in the rate hiking cycle. Currently, interest rate futures markets are factoring in zero rate hikes for 2019 and one rate cut in 2020. It looks increasingly likely that this hiking cycle is over. With the Fed minutes behind us, markets will now focus their attention to inflation data coming out. Additionally, the dominant themes of trade wars, tariffs and slowing global growth still weigh heavily on investor sentiment and appear to be keeping interest rates contained in this lower range.
Low Growth Ahead
The world economy is headed for a period of "dull, low" growth, according to fund manager Janus Henderson, but the risk of an outright recession remains small. Market participants are increasingly worried about the prospect of a serious economic downturn this year. A long-running U.S.-China trade war and uncertainty around the U.K.'s exit from the European Union has soured business and consumer sentiment in recent months. Most economists, as well as some the world's business elite, agree that economic growth is slowing but policymakers have expressed some hope for a soft landing rather than a full-blown recession.
Homebuilders Index Pops On Lower Rates
The nation's homebuilders are feeling better about the state of their industry as lower interest rates boost consumer confidence. Builder sentiment rose 4 points to 62 in February, according to a monthly survey from the National Association of Home Builders/Housing Market Index. The survey stood at 71 last February. Anything above 50 on the index is considered positive. Sentiment fell at the end of last year, largely because mortgage rates jumped in the fall, hurting affordability. Newly built homes come at a price premium to existing homes, so higher interest rates can have an outsize effect on the new construction market. Interest rates then fell sharply at the end of the year and have remained lower this year.
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Courtesy of Sotheby's International Realty's in-house Lender Simon Atik, 310.880.8414, Simon.Atik@grarate.com, Vice President of Mortgage Lending, Guaranteed Rate Affinity.
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