Will They or Won't They? (We Again Ask)

We're tired of writing about the Federal Reserve. We suspect that you're tired of reading about the Fed. But the Fed matters – to both the housing and mortgage markets – so we have no choice but to press on. 

Recent events had pointed to the Fed standing back from raising the federal funds rate in September. Specifically, economic growth remains anemic.  Gross domestic product (GDP) for the second quarter came in weaker than expected, at 2.3%. Most economists were expecting growth to post closer to 3%. 

Weakness was particularly pronounced in nonresidential fixed investment, which fell 0.6%. Commentators frequently focus on consumer spending when commenting on economic growth. To be sure, spending is important, but so is investment, because investment lays the foundation for future consumption: You have to produce in order to consume in the long run.  Production, which investment funds, paves the way for consumption.

When the disappointing GDP figures were released last Thursday, the yield on the 10-year U.S. Treasury note drifter lower by 15 basis points. In turn, rates on most mortgages, particularly the 15- and 30-year loans, drifter lower. Depending on the market, sub-4% on the 30-year loan could be had. 

But over the past day or so, yields and rates have drifted higher. One of the Federal Reserve's presidents, Dennis Lockhart, opined publicly this week that the economy could handle an increase in the fed funds rate in September. (The fed funds rate is the rate banks lend to each other overnight. It's a short-term rate, but it tends to filter through to the long end of the curve.) 

So what do private-market participants think will happen?

As for private-market traders, those who bet on interest-rate movements, the futures market has priced in a 50% chance the Fed will raise the fed funds rate next month. Last week, futures were priced at a 33% chance. So who knows what next week will bring. 

We remain skeptical that anything happens in September: Economic growth is still weak, while the U.S. dollar is still strong. Against most currencies, the dollar has appreciated significantly. A rate increase will only further strengthen the dollar against other currencies. For many multinational corporations, this is an issue. A stronger dollar makes exports more expensive and can result in significant currency-exchange losses when money is repatriated from overseas. We could see some additional push-back against a rate increase. 

With that said, we wouldn't be surprised if a rate hike occurs. The Fed may have to move to raise rates simply to maintain credibility. (You can drag people along only so far before they revolt.)  The impetus, then, is for rates to rise. (Keep in mind, they can rise without or without the Fed's blessing.)  Therefore, we're likely looking at the floor on mortgage rates. The mortgage rates we see today could be the best rates we see for quite a while.

Information provided by Jessica Regan.

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