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1. Fed Coffee Corner: Summary of July Fed Meeting & Market Implications ☕️

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Nuwave Rates Today

As detailed in Monday’s edition, the interest rate hike we saw today was already priced into the market.

This is why you are not seeing higher interest rates today, even though the Fed raised rates 25bps.

Fed Coffee Corner: Summary of July Fed Meeting & Market Implications ☕️

In their statement today, the Fed raised interest rates by 25bps - the highest in twenty-two years. They have now raised interest rates 5.25% since March of 2022.

Immediate effect on rate hike

By the end of the press conference, the MBS market was up nearly 25bps.

Why is that?

As I said on Monday, the MBS market already priced in this 25bps hike - we all knew it was coming.

However, the reason it came down is that the Fed’s statements were not nearly as hawkish as they were in June.

As detailed below, the statements made were all focused on the upcoming data we will receive before the September meeting.

Whereas last meeting, they told us with near certainty that more rate hikes were coming.

Since the upcoming mortgage interest rates are “data-dependent” there is not much movement in mortgage-backed securities. The Fed basically told traders to hold the line until the next few reports are released.

Fed Press Conference

Jerome Powell continues to emphasize that the Fed is “data-dependent”. He repeatedly pointed us to the following data to continue to watch:

• Low unemployment / tight labor market

• Moderate growth in the economy

• Slowed consumer spending

These factors are why the Fed is not pausing rate hikes. Unemployment remains low, and inflation has not come down far enough to warrant a pause in rates.

Are additional rate hikes on the way?

Maybe.

The good news is that we have a slight break from Fed monetary manipulation - the next time we will see Powell in front of the mic is eight weeks from now at the next meeting - September 20th.

In that time we have four large data points that the Fed will look at to determine what they will do in the Fall:

1. July Jobs Report - Aug 4th

2. July CPI Print - Aug 10th

3. August Jobs Report - Sep 1st

4. August CPI Print - Sep 13th

If these reports show that the economy, consumer spending, and the job market have continued to slow, there will not be rate hikes.

If there are outlier data, such as a hotter-than-expected CPI or higher-than-expected jobs report (as we saw a few weeks ago from ADP) it could lead the Fed to continue to raise rates.

One thing we know for sure - rates are not going to be cut. 

Powell emphasized this point again in today’s meeting - they have no expectation that rates will be cut this year. At best, we would see rates getting up Q1 or Q2 of next year.

They want to be sure that inflation comes down to a sustainable level.

What does it mean for mortgage rates and your clients?

This is going to be all over social media and your clients will inevitably send it to you. But, clients are not going to wake up tomorrow and see rates at 7.5%.

The market is going to stay flat through the end of the month because all of this was already priced in.

The next time we are going to see mortgage rates change for clients is August 4th - when the July Jobs report is released.

If you have clients out looking - they should not see huge changes in their preapprovals.

My opinion

This is the meeting we should have had in June.

As I said in the previous Fed Coffee Corner the pause in June was a complete waste of time. We knew that there was only going to be one significant piece of data before today’s meeting - June CPI.

As Powell said himself, that was only one piece of the puzzle and not enough to move the needle - so why did we waste 5 weeks to raise rates? If we had just raised interest rates last month we would be in the same position as today.

The Fed is not telling us anything we do not already know, which is why you are seeing a lack of movement in the interest rates today.

Now that we have an 8-week break, the Fed will gather enough data to forecast the rest of the year.

If I were a betting man, I would expect us to hold rates where they are today through the end of the year. There is a good chance we are at the end of the hiking cycle.

In summary, this should have been an email from JPow.

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Let me know your thoughts in the comments…

Thanks for reading - that is all we have for today 😎

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— Michael F DiLucchio