What the Latest Fed Statement Means to Us

Housing and mortgage markets are supposed to be the focus, but a lot of time is spent vetting the Federal Reserve. We have no choice. The Fed is the guiding light of all financial markets these days.

Look no further than Fed Chair Janet Yellen's comments on Wednesday. For most of the day, financial-market participants were on the edge of their seats, anticipating somewhat anxiously how she would guide: Is an interest rate hike imminent or not?

We mentioned last week the importance of the word “patient.” The Fed had used that word as a way of telegraphing that no rate increase was imminent. In the latest meeting minutes, “patient” was removed, but no need to fear. The lack of “patient” does not imply impatience.

Despite strong monthly job growth over the past year, the Fed is still unsatisfied with economic growth. In fact, the Fed lowered its 2015 and 2016 outlook for gross domestic product (GDP) growth. At the same time, inflation remains muted. In other words, the Fed has the leeway to remain patient when it comes to raising interest rates.

Markets were somewhat impatient in their reaction to the good news. The major stock market measures spiked higher. Conversely, bond yields spiked lower. The yield on the 10-year U.S. Treasury note fell 10 basis points. The 10-year note now yields less than 2%.

As the yield on the 10-year note goes, so goes mortgage rates. Rates on both the 30-year and 15-year loans were significantly lower on Wednesday (though on Thursday they began to drift higher).

Now the question is, should we expect these lower rates to hold?

If you talk to mortgage-rate watchers, most still anticipate the Fed to raise the federal funds rate this year, possibly as soon as June. We are somewhat more circumspect. We would not be surprised to see a rate hike postponed until 2016. We say that because the U.S. dollar remains strong on the world market. An interest rate increase would make the dollar even stronger. (A strong dollar is a mixed blessing: imports are cheaper, but some exports are more expensive.)

Easy money everywhere also mitigates the odds of a rate increase. More than 20 central banks have implemented easy money policies since December. If the Fed moves to tighten its monetary policy – which an interest-rate hike would do – that ensures an even stronger dollar.

In short, there is no overwhelming reason for the Fed to begin raising interest rates. This tells us that sub-4% on the 30-year fixed-rated loan will be with us for a while.

Information provided by Jessica Regan.

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