This past week the Federal Reserve cut the Fed Funds Rate for the second time this year, lowering the rate to 2.00%. Remember that the Fed Funds Rate is a short-term, overnight rate that has little effect on home loan rates. Home loan rates respond to the trading activity in mortgage bonds, which are influenced by the economic outlook and inflation expectations.
Not all Fed members were on board with the .25% rate cut. A few preferred not to cut rates while another wanted a bigger .50% cut.
Along with the Fed rate cut, here are three important takeaways from Fed Chair Powell’s press conference and the Monetary Policy Statement:
- There is no recession in sight. One of the fears in recent months and cause for home loan rates to decline this summer was the fear of a recession. Powell debunked the recession myth, which is the reason why they suggested the possibility of no more rate cuts in 2019…the U.S. economy is doing fine.
- The consumer is also alive and well. The main reason the U.S. economy won’t slip into recession is because the U.S. consumer has never been more willing and able to spend money. Consumer spending makes up nearly two-thirds of U.S. economic growth (Gross Domestic Product), so a recession will not occur while the consumer remains confident.
- Exports have slowed. This was a negative point from the Fed statement. There are a couple reasons – one being the uncertainty surrounding the U.S./China trade dispute. But there is another reason they have slowed, and it is because our exports are too expensive for other countries, because our U.S. dollar has strengthened against other global currencies. This is why the Fed will likely cut rates again, despite suggesting otherwise, to soften the U.S. dollar and make our exports cheaper to other countries.
After the Fed came and went, home loan rates actually ticked up slightly. Why? The U.S. economy is not slipping into a recession and the Fed will take measures, like cutting the overnight Fed Funds Rate, to prevent it from doing so. Remember, good news is bad news for home loan rates.
Bottom line: If you have a family member, friend, or client considering a refinance or home purchase, there may never be a better opportunity to lock in a home loan rate, while they hover near three-year lows.
Forecast for the Week
After a volatile week, the upcoming five trading days could continue to deliver more action with a packed economic calendar that features housing, inflation numbers, consumer confidence, spending, and sentiment.
The Fed’s favorite inflation gauge, the Core PCE, will be released this week, which will be closely watched by investors and Fed Chair Powell. Inflation has been running low and should continue to be muted for the foreseeable future.
Throw in the ongoing trade issues and Mideast tensions, and we could see continued volatility. In addition, the Treasury will be selling a whopping $113B in 2-, 5-, and 7-year notes, which could impact bond trading.Reports to watch:
- Housing data comes from Tuesday’s S&P Case-Shiller Index, New Home Sales on Wednesday, and Pending Home Sales on Thursday.
- Consumer Confidence will be released on Tuesday with Consumer Sentiment on Friday.
- The third reading on Q2 2019 Gross Domestic Product comes on Thursday along with Weekly Initial Jobless Claims.
- On Friday, the Core PCE, Personal Spending, and Incomes will be delivered, along with Durable Orders.