We’ll Believe It When We See It

June 15 came and went, and it came and went as we expected it would, with the Federal Reserve again postponing raising the federal funds rate.

It’s like deja vu all over.

To start 2015, we predicted that the Fed would not raise interest rates that year.  We weren’t foiled until December, when the Fed raised the target range on the fed funds rate by 25 basis points.

We then started 2016 by expressing skepticism that the Fed would raise the fed funds rate within the first six months. We’ve been proven correct.  Now, we wouldn’t be surprised if we went the entire year without a rate increase (though we could well be foiled again in the later months).

We’re not alone in our skepticism. Traders in federal funds rate futures contracts aren’t giving 50/50 odds of a rate increase until December.  These same traders – who can be a schizophrenic lot – entered 2016 giving 50/50 odds for a June rate increase.

In testimony before Congress this past Tuesday, Fed Chair Janet Yellen gave pretty much the same reasons we’ve been giving for holding off on a rate increase: Stagnating domestic economic growth, subdued economic growth with our primary trading partners, a strong U.S. dollar, weak commodity prices, and the recent slowdown in payroll growth.

It has become apparent that the Fed’s crystal ball is no more clairvoyant than the crystal ball of anyone who spends time monitoring financial markets. Just a few months ago, the Fed said everything was on the mend and that rate increases would come in short order. (Actually, the Fed foreshadowing rate increases is a new convention. Before the 2008 financial crisis, the Fed didn’t tell it just did.)

That said, interest rates have trended higher. The yield on the 10-year U.S. Treasury note gained nearly 14 basis points this past week. As the yield on the 10-year note goes, so, too, go mortgage rates.  Quotes on the 30-year fixed-rate loan have hit a two-week high.

This isn’t a total surprise.  Last week, we mentioned that the rumor (or the anticipation of news) moves markets more than the news itself.  When it became apparent that the Fed would raise rates in December, rates moved higher.  When the Fed actually raised rates, rates drifted lower.

This go around, rates dropped when it became apparent the Fed would not raise rates.  When it didn’t raise rates, rates moved higher.  Market participants frequently buy the rumor and sell the news.

Until we’re proven wrong, we’ll stick with the status quo: Low mortgage rates for now and for the indefinite future.

Information provided by Jessica Regan.

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