Fed Meeting Minutes Summary:
FED LEAVES INTEREST RATES UNCHANGED IN UNANIMOUS VOTE
FED HOLDS RATES, PLEDGES `PATIENT' STANCE ON FUTURE MOVES
FED REMOVES REFERENCE TO FURTHER GRADUAL RATE INCREASES
FED SAYS IT'S PREPARED TO ADJUST BALANCE-SHEET NORMALIZATION
FED SAYS LABOR MARKET STRENGTHENED, UNEMPLOYMENT REMAINED LOW
FED SAYS ECONOMIC ACTIVITY RISING AT SOLID RATE, JOBS STRONG
In the first FOMC meeting of 2019, the Fed slams on the brakes, while leaving rates unchanged as expected. The Fed basically capitulated to the markets and rolled over on future rate hikes – futures markets are pricing in ZERO rate hikes in 2019 right now. Again, sharp reversal from a month ago as the Fed did NOT say they expect to keep raising interest rates. All assets like the news as both stocks and bonds are up sharply, pushing rates a few bps lower.
Mortgages are continuing to rip higher after the Fed clearly signaled a pause in rate hikes, saying it can be patient in adjusting its strategy. Also helping mortgages, Fed Chair Powell stated he doesn’t see the Fed changing its strategy for shrinking the Fed’s balance sheet – meaning they’ve alleviated the market’s fears regarding the selling of mortgage backed securities from the portfolio. As a result, MBS are nearly a ½ point higher in the last 24 hours, sending interest rates lower. Amazing that over the span of 90 days, the Fed has completely changed course and appears to be executing a soft landing in a slowing economy. There’s little doubt that, with real interest rates in the US being the highest amongst the G-7 countries, further interest rate hikes risked a not-so-happy ending and eventual inverted yield curve. Right now, the spread between 2yr and 10yr treasuries sits at just 16bps. I think the biggest question, is what happened over the past few weeks to cause this? Stock market volatility, global slow-down in business conditions (especially China), disappointing inflation numbers, China/US tariffs, slumping oil prices… I suppose you can take your pick. Speaking of tariffs, interest rates aren’t out of the woods yet. Today, US officials will conclude two-day meetings with China on trade negotiations. There is no formal press conference, but stay tuned to the President’s Twitter for any updates. Tomorrow we also get the January Employment report before we set rates. We could be in for a volatile morning between the two events mentioned here, especially given the affects from the shutdown are largely unknown. This post-Fed market response has been very impressive, with the 10yr yield blowing through resistance at 2.64% - currently trading at 2.62%. I suspect we’ll eventually see the 10yr return to 2.55%, the low from the first week of the year, but not until we get through the next 24 hours of events.
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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