As expected, the members of the Federal Open Market Committee voted to hold their key fed fund rate unchanged. Today’s decision is the first time the Fed has held short-term interest rates steady since they embarked on a series of rate cuts that dates back to last September.
In their much anticipated post-meeting policy statement, policymakers signaled that while the economy still faces some rather stiff headwinds, the chance of a severe economic slowdown or outright recession has diminished. The Committee went on to say, “In light of the continued increase in the prices of energy and some other commodities and the elevated state of some indicators of inflation and the elevated state of inflation expectations, uncertainty about the inflation outlook remains high.”
The initial sell off in the mortgage market was created by that last sentence. All many mortgage investors heard was the “. uncertainty about the inflation outlook remains high” phrase. After the initial knee-jerk sell off in the mortgage market calmer, cooler heads have since entered the market – realizing that the Fed stopped well short of suggesting an imminent acceleration of inflation pressures is likely – which by extension also means attendant short-term interest rate hikes are not likely to develop any time soon either
I look for mortgage investors to remain very cautious with their pricing – at least until he Treasury’s auction of $20 billion in 5-year notes ends tomorrow afternoon at 1:00 p.m. ET. Once the auction is over – I think the potential for upside investor price gains will improve notably.