Federal Reserve Chair Jerome Powell said today’s high mortgage rates are dissuading some would-be sellers from putting their homes on the market, further limiting lending opportunities in an environment already constrained by low inventory

Lenders are brushing up on ways to minimize losses associated with the increasing costs to fund mortgage pipelines.

The FOMC held its target range for the federal funds rate at 5.25% to 5.5%, while updated quarterly projections showed 12 of 19 officials favored another rate hike in 2023, underscoring a desire to ensure inflation continues to decelerate.

Rep. Andy Barr, R-Ky., chairman of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, continued to say that the Basel III rulemaking might have violated the Administrative Procedures Act

The Fed did not hike its policy rate today, but it did release updated forecasts that showed the average Fed member expects rates to be half a percent higher at the end of 2024 and 2025 compared to their forecasts released in June. The market was expecting a higher average forecast, but not that high.  The result was broad bond market weakness.  While that weakness was concentrated in the shortest-term bonds, longer-term rates (like those for mortgages) also took a hit. The inspiration for that weakness should not be confused with the Fed announcement itself or the press conference with Fed Chair Powell afterward.  As always, there are many comments that can be singled out as having an impact, but the only truly new and surprising news was in the updated forecasts. Notably, these forecasts can be wildly inaccurate.  The Fed knows this.  The market knows it.  But the market is only relying on the forecasts to measure the Fed’s attitude toward its rate-setting policy–not to accurately predict actual rate levels.  Bottom line: the Fed continues choosing to talk tough on the rate outlook and the market has no choice but to comply.  This will only change when the economic data looks gloomy enough to soften the Fed’s stance. In context, today’s mortgage rate increase wasn’t extreme.  In fact, the day began in slightly better territory and only went higher after lenders changed rates in the afternoon.  Versus yesterday afternoon, the change is minimal in the bigger picture.  We’re still not back to the long term highs seen at the end of August. 

Higher For Longer

Today’s Fed announcement was largely as expected: no rate hike, “data dependent,” and “higher for longer” communicated via the dots.  The direction of the change in the dot plot is no surprise, but the magnitude was.  The median Fed member moved their forecast up by 0.50% through both 2024 and 2025.  Granted, those forecasts have a poor track record of predicting the future, but they speak to the Fed’s will to continue hiking if the data remains resilient. Bonds held their ground reasonably well at first, but late day position squaring resulted in a break to new long term yield highs. 

Econ Data / Events

Fed Dot Plot Changes

 2023

5.625% (range 5.375% to 5.625%); prior 5.625%

2024 

5.125% (range 4.375% to 6.125%); prior 4.625

2025 

3.875% (range 2.625% to 5.625%); prior 3.375%

2026 

2.875% (range 2.375% to 4.875%)

Market Movement Recap

09:24 AM gradually but modestly stronger throughout the overnight session.  MBS up 6 ticks (.19). 10yr down 3.4bps at 4.329.

01:24 PM 10yr down 4.6bps, near best levels at 4.317.  MBS up 6 ticks (.19) again after some AM volatility.

02:05 PM Sharply weaker after Fed announcement.  MBS down 3 ticks (.09) and 10yr up to 4.359

03:22 PM Volatile 2-way trading since Fed.  Powell press conference is over.  MBS down 7 ticks during moments of illiquidity (-0.22) but only 1-2 ticks otherwise (0.03-0.06).  10yr down 1bp on the day at 4.353.

04:41 PM Weakest levels of the day.  MBS down 9 ticks (.28) and 10yr up 3.4bps at 4.397.

The Digital Mortgage Conference – taking place September 26 to 28 at the Wynn Las Vegas – is the can’t-miss-it mortgage tech event of the year. It’s not too late to register.

A new label and disclosures for certain mortgage securities may create more of an impetus for lenders to extend credit to underserved populations.

The Consumer Financial Protection Bureau issued guidance on the use of artificial intelligence in credit underwriting, saying that creditors are relying too heavily on a CFPB checklist and sample forms when they should provide specificity to explain why a consumer is denied credit.

The FOMC (Federal Reserve’s Open Market Committee) is what most people are referring to when they say “the Fed.” This is the group that meets 8 times a year to decide the ideal level of the Fed Funds Rate.  The Fed Funds Rate sets an anchor point for the shortest-term borrowing.   Notably, the Fed doesn’t directly set mortgage rates, but even when the Fed makes no changes to the Fed Funds Rate, there can be large, indirect effects on mortgages and just about every other type of interest rate. With that in mind, the Fed is indeed not expected to raise the Fed Funds Rate when it announces the results of its 2-day meeting tomorrow afternoon, but there are many other ways it can have an impact on broader rate momentum. One of the most reliable sources of market volatility on Fed days has been the “dot plot.” At the same time as the official rate announcement, the Fed also releases economic forecasts which include each Fed member’s expectation for Fed Funds Rate levels at various points in the future.  These levels are represented as dots on a chart, hence the “dot plot” (or simply “dots”) nomenclature.  Some market watchers think the dots will show the Fed expecting to hold the Fed Funds Rate “higher for longer.”  That’s the sort of thing that could result in upward pressure on mortgage rates despite the absence of an official Fed rate hike.  On the other hand, “higher for longer” is a fear that has arguably already been traded by financial markets to a large extent.