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The Fed didn't make a move at the March meeting, but what the Fed had to say about future policy has implications for mortgage rates.

The Fed didn't make a move at the March meeting, but what the Fed had to say about future policy has implications for mortgage rates.

Setting The Stage For Summer

March 22, 2024 -- The March meeting for the Federal Reserve has now come and gone, but the message remains roughly the same. In fact, the official meeting-closing statement was nearly unchanged from the one in January with just a few words regarding moderation in hiring trends omitted.

After a couple of inflation readings that were surprisingly high to start the year, there was perhaps a little concern among investors that the Fed's December projection for three rate cuts this year might be adjusted downward. However, when the updated Summary of Economic Projections from Fed members was released, the outlook for monetary policy remained unchanged and still forecasting three cuts in rates to come this year.

While the interest-rate outlook for this year remained the same, members measurably ratcheted up their forecasts for economic growth in 2024 and lifted their expectations for core PCE inflation from 2.4% to 2.6%. With such a forecast, it wouldn't have been at all unusual to see expectations for rate cuts to be diminished somewhat, but the incoming price data since December seemed only to corral some members who in December were expecting to be cutting rates more aggressively this year.

In comparing the two "dot plots" of the SEP from December versus March, the number of expected rate cuts is still three, but this forecast somehow seems to be being made with less conviction. By way of reference, there were five Fed members who expected four or more cuts back at the end of last year; there is just one now. With this in mind, December now looks more like a forecast of three-to-four" rate cuts this year, while March looks more like one of two-to- three, at least to us.

In his post-meeting press conference, Fed Chair Powell reiterated that "it will likely be appropriate to begin dialing back policy restraint at some point this year. The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate."

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When pressed as to whether the recent above-expectation inflation readings were a concern, Mr. Powell said that the January and February data "haven't really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward two percent." The Fed has been looking for mostly benign inflation readings to continue to provide confidence that inflation will reliably move to the Fed's 2% core PCE goal and remain there. With regards to the firming of inflation at the start of 2023, he did caution that "I also don't think that those readings added to anyone's confidence that we're moving closer to that point."

He added "We were saying that well, it's going to be a bumpy ride. We consistently said that. Now here are some bumps and the question is; are they more than bumps? And we just don't, we can't know that. That's why we are approaching this question [of when to start cutting rates] carefully,"

While considering what to do with interest rates in the future, the Fed is also pondering how to best manage its massive holdings of bonds. The Fed's securities holdings have now declined by nearly $1.5 trillion since it began its Quantitative Tightening (QT) process back in June 2022. After the rapid diminishment in holdings over the past 21 months, Mr> Powell said that the Fed now thinks that it "will be appropriate to slow the pace of runoff fairly soon," but that this "does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach that ultimate level more gradually."

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As we discussed in our post-meeting Fed analysis, the decision to slow the pace of reducing holdings is most likely to mostly happen for the Treasury component, where the present reduction rate of $60 billion per month will be trimmed. As Mortgage-Backed Securities (MBS) reductions have fallen well short of monthly targets since QT's inception, there will likely be no change to this portion of the program, at least for the time being. In his comments, Chair Powell noted "There isn't much runoff in MBS right now but there is in treasuries and we're talking about going to a lower pace." Any effect on mortgage rates from the change in Treasuries is likely to be minimal if any, but it could help longer-term yields to decline slightly over time.

Overall, investors seem pleased with the Fed's continued stance. Considering it perhaps a little more deeply, the dot plots in the SEP strike us as indicating that Fed members are slightly more wary about the inflation picture and somewhat less committed to cutting rates than they were just three months ago. Inflation needs to settle back to a slower pace if the first rate cut is to come this summer, and the next month or two of data will be critical to keeping that first cut on track.

Still, that appears to be the expectation. Presently, futures markets investors reckon about a 14% chance of a move actually coming in May (up from about 4% before the meeting) and a 71% chance of the first trim to rates coming at the June FOMC meeting that closes on June 12.

For those giddy about the prospects for lower rates, we can only say that it's important to temper that enthusiasm. The reality is that even if the three expected cuts do come to pass this year, a 4.6% median federal funds rate would return it only to about where it ended 2022 and began 2023... and this would still be as high as this rate was back in 2007. In reality, rates would be moving only from about 23-year highs back down to the equivalent of 16 or 17 year highs.

The Fed is counting on a general, gradual slowing of economic activity to help loosen labor markets and contain inflation over time. Overall GDP growth ran at a fairly warm 3.1% rate for all of last year, and at 3.21% slightly above that pace in the fourth quarter; the final review of that period is due out next week. So far to start this year, it looks as though economic growth has throttled back a fair bit. With somewhat more than half of this quarter's data incorporated into the model, the GDPNow tool from the Federal Reserve Bank of Atlanta puts growth for the first quarter of 2024 at a solid-yet-unspectacular 2.1% annual rate. Should it hold, this is a rate slow enough as to allow some space for cutting rates, at least a little.

Mortgage rates that fell by more than a percentage point through December ignited existing home sales a bit. The National Association of Realtors reported that closed sales in February rose by 9.5% compared to January, landing at a 4.38 million annual pace, the fastest homes have sold since last March. There was an increase in the actual number of homes for sale during the period; however, the increase of 5.9% to 1.07 million homes available was overcome by stronger demand, so the available inventory-to-sales ratio retreated to just 2.9 months of supply at the current rate of sale. By this measure, the inventory of homes for sale is now the thinnest since last April.

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The sizable bump in homebuyer demand and more muted bump in supply helped lift home prices again. The median price of a home sold in February was 5.7% higher than those sold in February last year, and the typical seasonal decline for home prices was both shorter and shallower than normal this year. By way of comparison, from the record $413,800 peak in June 2022 the seasonal price decline through January 2023 was 12.7% to $361,200; however, from the second highest all-time mark last June of $410,100, the decline through January of this year was only 7.7% to $378,600. As such, it seems increasingly likely that we'll see new record high existing home prices by the time the typical June peak sales are tallied. Unfortunately, there are few expectations that mortgage rates will be low enough by then as to provide much by way of offset to help maintain affordability.

Tight existing housing market conditions mean opportunities for the nation's home builders, and they are increasingly happy about their prospects. The National Association of Home Builders released this week its Housing Market Index for March, and a fourth consecutive increase in this indicator was seen. What's more, the top-line figure actually moved above the par level of 50 this month, landing at 51; while still just barely positive, the value was nonetheless the highest since last July. A sub-measure tracking sales of single-family homes moved up four points to 56, a solid standing, while expectations for sales conditions in the next six months pushed a little deeper into robust territory with a two-point rise to 62. All this enthusiasm came even as traffic at model homes and sales offices remained pretty weak, although the two-point increase to 34 did leave this measure at its highest spot since last August.

Builders are likely also cheered by increasing construction activity. After a rather soft January (likely weather-related), construction on new residences rose by 10.7% in February, rising to a 1.521 million annual rate. Single-family housing starts led the way, flaring higher by 11.6% to a 1.129 million annual pace while the smaller multi-family sector saw an 8.3% gain to a 392,000-unit level. Permits for future activity were already pretty high, but also managed to increase as well, with overall housing construction permits rising 1.9%. Adding more supply to the nation's housing stock will ultimately help ease the tightness in housing markets, but this will take both time and continued favorable conditions for builders to actually take place.

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Although noteworthy, it's hard to make much of the first positive reading in the Conference Board's Leading Economic Index since February 2022. The LEI started routinely declining in March 2022 and posted an unbroken string of declines until this month. That continued run of declines suggested that the economy should have been in or at least near a recession at some point in the last year, but GDP has been solidly positive for the last six (and soon to be seven) quarters now. Just as the declines didn't foretell a recession, it's not clear if the 0.1% increase tracked here represents a measurable pickup in economic activity. In fact, the Conference Board said that "Despite February’s increase, the Index still suggests some headwinds to growth going forward. The Conference Board expects annualized US GDP growth to slow over the Q2 to Q3 2024 period."

A local review of manufacturing activity from the Federal Reserve Bank of Philadelphia found modestly positive conditions for a second straight month. The 3.2 mark in March for this local indicator was a deceleration from February's 5.2, but any gains for manufacturing have been hard to come by, let alone back-to-back positive moves. As measured here, new orders firmed up by 10.6 points, rising from -5.2 a month ago to +5.4 in March, while employment conditions remained soggy, posting -9.6 this month after -10.3 in February. As far as costs go, the "prices paid" measure showed barely any change at all, with the 3.7 reading for this component the smallest figure in nearly three years.

The Fed again noted that labor supply and demand continue to come into better balance. Businesses continue to hold onto the workers they have, and initial claims for unemployment assistance continue to burble along at a very low level. In the most recent survey week covering March 16, just 210,000 new applications for benefits were filed, a figure barely changed from any of those seen over the last month, if not longer.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Mar 15Feb 16Mar 17
6-Mo. TCM 5.37% 5.30% 4.82%
1-Yr. TCM 5.01% 4.94% 4.34%
3-Yr. TCM 4.39% 4.37% 3.89%
10-Yr. TCM 4.21% 4.26% 3.53%
Federal Cost
of Funds
3.889% 3.876% 3.139%
30-day SOFR (daily value) 5.31864% 5.32440% 4.55806%
Moving Treasury Average
(MTA/12-MAT)
5.088% 5.089% 3.466%
Freddie Mac
30-yr FRM
6.74% 6.90% 6.42%
Historical ARM Index Data

Applications for mortgage credit declined by 1.6% in the week ending March 15. The Mortgage Bankers Association reported a 1.2% decline in requests for funds to purchase homes and a 2.5% drop in those to refinance them. With mortgage rates even firmer this week than last there likely won't be much improvement seen for this week either, but an expected settling of rates as the month winds to a close may perk up borrower demand a little.

Mortgage rates ran up a little bit coming into this week on concerns that recent inflation reports might change the Fed's thinking. While overall that doesn't appear to be the case, this does lend somewhat more weight to updates on prices when then do come. Next week the PCE price indicators for February are due out, but it's a given at this point that they won't be all that favorable, at least if the February CPI, PPI and other inflation reports are any indication. While the PCE update cannot be completely discounted, it's the March and April reports that will hold more sway over rates as we move more deeply into the spring.

More immediately, though, the bit of relief that the Fed didn't significantly change its outlook for policy has allowed the yields which underpin mortgage rates to settle back a little bit over the last couple of days. Based on this, we think there will be a six-to-nine basis point decline in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac when next Thursday rolls around.

What will become of mortgage rates as winter slowly fades to spring? Have a look at out latest latest Two-Month Forecast for mortgage rates, covering February and March.

To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more; come July, we do an interim review of our expectations. Have a look and see if you think we're off or on point with our long-range forecast.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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