In the just-released FOMC statement, the Fed announced a pause in the rate cut campaign that started with a 50ps cut in September last year and saw 25bps consecutive cuts in November and December, a cumulative 1% rate reduction. This keeps the Fed funds range at 4.25% to 4.50%.
A quick reminder: today’s Fed decision does not directly keep term rates like fixed mortgage rates unchanged, but it does influence them through market expectations for the economy, labor force, and inflation, as seen through expectations of the Fed’s timing of additional rate cuts. Since a pause in the Fed’s rate cut plans was expected, that piece was already baked into term rates, but any “new” news from the Fed today could still result in term rate changes.
Today’s Fed meeting does not include updated projections to the members’ “dot plot” projections. That means market reactions will come from revisions to the policy statement and Chairman Powell’s press conference.
At his press conference, expect Powell to be questioned again about the Fed’s independence from the President, and what additional uncertainty the Fed’s projections have from the impact of the deportations, tariff, and energy plans as those actions unfold.
Since the President’s inauguration, we have seen the equity and bond markets demonstrate the expected volatility in reaction to the new administration’s flurry of initial actions. We can expect this to continue as additional actions occur, the effects of those actions filter into the economy, and as the market continues to react. We can also expect higher volatility to continue as the actual impact of these policy moves begins to show up in the backward-looking economic indicator readings. That won’t be until sometime mid-year. This all adds up to a greater level of uncertainty for the Fed, and in turn, for the markets to continue for the immediate future.
What’s Next?
Powell’s guidance on the length of this pause in the Fed’s forward path for rate normalization will be listened to closely. Changes to expectations of the landing rate and a now slower pace of rate cuts to reach it will set the stage for the market’s interpretation of economic indicators over the next few months’ time. Of particular interest will be how Powell addresses the independence of the Fed in terms of how and when it makes rate decisions.
The complicating matters of geopolitical risks associated with the wars in Europe and the Middle East, including the way forward for Syria and Iran are ever-present as well. Geopolitical events can create an added layer of rate volatility — specifically, the possibility for sudden rate drops, then a grind back to the higher rates we face today.
If economic indicators show more modest impacts from the administration’s actions, current lower rate projections will factor back into rates. The level of uncertainty will control how quickly that will be seen in mortgage rate sheets.
What Do Borrowers Do Now?
Originators should explain to borrowers looking to finance the purchase of a home that even as rates are still expected to fall over time, but at a slower pace, the current mortgage rate market remains exposed to greater-than-typical levels of uncertainty within a typical rate lock period.
The available housing inventory remains tight and will remain so for years to come. Home valuations continue to increase, making homeownership a key to building wealth for Americans. After finding a home for purchase and achieving an accepted offer, the best course of action is to secure financing quickly to avoid the worst of possible market volatility that could upend those plans.
