The Federal Reserve has increased the Fed Funds Rate by 0.25%, in line with the consensus. The Fed’s latest forecasts show no rate cuts by the end of the year and slightly higher rates by the end of 2024, which is different from market expectations of a 0.75% cut.
The Treasury yields and mortgage rates decreased notably following the announcement from the Fed.
How could that happen?
The Fed Funds Rate does not directly affect mortgage rates, and Fed Chair Powell recently spoke about tightening lending conditions due to recent banking issues, which could impact the economy.
Lending and credit play an important role in both growth and inflation. If lending decreases, it can contribute to lower inflation. High inflation is one of the reasons why interest rates remain high.
Despite the Fed rate hike and stable outlook for 2024, Powell’s comments led to indications of a policy shift in the market’s cycle of economic growth and inflation. Alternatively, investors may have been concerned about potential banking issues after Powell’s warning.
The result was an impressive improvement for the average lender, with 30yr fixed rates dropping nearly a quarter point in many cases. It remains to be seen if this is a temporary sigh of relief or a sign of things to come. That question will likely be determined by data and whether or not we see additional bank drama in the near term future.