The Federal Reserve Board meets again this week, at least in a slightly different interest rate environment. Since cutting interest rates in March 2020, Fed chairman Jerome Powell has kept policy rates steady at 0.25% and maintained a significant rate of monthly quantitative easing buying. Now, however, markets are starting to raise rates as positive economic and epidemiological news begin to change the picture. As the mortgage professionals face the end of the refi boom and realignment of their own market, MPA spoke to Fannie Mae Chief Economist Doug Duncan (pictured) to find out what to expect from Powell’s announcement.
“Several times in the press conference after the last Federal Reserve Board meeting [Powell] referred to the nine million more unemployed than at the beginning of the virus. The Fed is currently very focused on the labor part of the dual mandate, ”said Duncan. “I wouldn’t expect a fundamental shift in their announcement.”
This focus on the goal of full employment will leave room for inflation, according to Duncan. While questions remain as to how long Powell will keep inflation above its 2% target, Duncan noted that the Fed has so rarely achieved that target in the past 20-25 years that Powell may take a less Hawkish view.
The current rising interest rate environment, said Duncan, could have been caused by some different market outlook. The first is a positive response to economic growth. The second is that in a recovering economy with an economic upturn of $ 1.9 trillion, inflation could rise and force the Fed to hike interest rates. The third is a combination of the two factors as markets predict that economic growth will outperform potential in 2022, which should lead to some inflation.
Duncan noted that the inflation picture is very difficult to paint in detail in the short term.
With interest rates soaring, Duncan predicts that Powell will do nothing to bring them back down. The need to facilitate full employment and the relatively small risk of runaway inflation, he believes, mean that Powell will accept that the interest rate environment will simply rise.
To the Mortgage professionals Duncan attended the press conference on Wednesday and said to be aware of a comment on the appreciation in house prices. It has been claimed that house prices were not in a bubble at the last press conference, and if that view changes at all in the face of pressures on borrower affordability, we could see an impact on the market.
While the nationwide rapid vaccination rate is making headlines and creating euphoria, Duncan noted they are unlikely to sway Fed decisions. Most economists predicted widespread vaccination by the third quarter of 2021, which we seem to be on the right track. Employment, Duncan said, will continue to be the focus for Powell.
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Duncan believes the interest rate environment, as much as some mortgage experts would like to see it fall again, is unlikely. Given this prospect, mortgage professionals need to do what analysts and pundits have largely said over the past year: get ready to turn around for the purchase.
“I don’t see rates falling much again, nor too far from where they are today,” said Duncan. “I think part of the run-up is simply that stronger growth is expected, which is certainly included in our forecast. If our forecast is correct, and we’re getting something in the 6% to 7% growth range, then you may find interest rates keep rising, and it may be imperative that you already have your funding backed up for people who are buying homes, not just refinancing homes . For me, that’s the bread and butter of this business anyway, lending money to people who want to buy a house. As the rates go up, your emphasis on this part of the business becomes even more important. “