In the past two weeks there has been big news about inflation and what appears to be big news about Fed policy. Both are threats to low interest rates, but apparently not yet.
After accepting last week’s huge inflation figures, the bond market turned its focus on Fed policy this week.
The Federal Reserve (also known as the Fed) is often a source of confusion for consumers when it comes to mortgage interest. The evening news says, “The Fed has left rates unchanged,” and people assume that this has something to do with mortgage rates.
The Fed Funds Rate (what the Fed actually chooses to increase, decrease, or hold stable) has almost nothing to do with the mortgage market. Mortgage rates are infinitely more concerned with the Fed’s Bond purchase Guidelines.
Movement in the bond market is the Foundation, endowment of daily mortgage rate changes. Bonds can move for a variety of reasons, but the most reliable and fundamental reason is “supply and demand”. By acting as a massive buyer of bonds (including the bonds that directly underlie mortgages), the Fed is increasing demand relative to supply. Higher demand means higher bond prices and higher bond prices mean lower interest rates, all other things are the same.
In other words, buying Fed bonds = lower interest rates, and buying them more than anyone for a long time. Ideally, the Fed doesn’t have to do this forever, however Change is scary if it relates to the Fed, it withdraws support.
It was that kind of change that triggered that tantrum in 2013, which was some of the most abrupt rate hikes in decades. The markets are understandably cautious about repeat performance and market participants thought They saw evidence of a rejuvenation in Wednesday’s Fed meeting minutes (a more detailed account of the meeting that happened three weeks ago).
But these comments were Nothing like the discussion about tapering in 2013. Back then several Fed members agreed, and Bernanke (the then Fed chairman) was already on record discussing the terms of a conical taper.
This time, the comments on tapering merely repeated comments from various Fed speeches over the past few weeks. Not only is the Fed far from disagreement on this, but there is much greater uncertainty as to when it will pull the trigger.
Even then, to say the comments were very conditional would be one understatement. See for yourself:
“A number of participants suggested that in the upcoming meetings it might be appropriate to discuss a plan to adjust the pace of asset purchases as the economy continues to make rapid progress towards the committee’s objectives.”
Translation: The Fed isn’t even talking about rejuvenating. There are only 4 Fed members who agree should talk about it in the future if certain things happen. Quite logical, actually … The market reaction was also logical: initially shocked, but quickly reassuring.
The Fed needs to see several Months of strong economic data before solid rejuvenation discussion. Even then, the pain of the tantrum in 2013 means traders have been gradually positioning themselves for this discussion for many months. When the time comes, there will be a lot less to worry about – at least when it comes to buying Fed bonds.
In this week’s economic data, sales of existing properties fell again.
How is it that sales continue to decline when we hear so much about a shopping spree in many local real estate markets? The explanation was and is one of Inventory! The following table shows the monthly change in the existing house inventory. It’s a very seasonal thing, and it always peaks with the April numbers (reported towards the end of May). Each red bar is April. As of this week’s report, the last two April now stand as the lowest housing stock winners in decades.
But that’s for existing Houses. How about New Houses? Well … builders build as fast as they can. Disruptions in the supply chain, land availability, labor problems and price pressures lead to delays. The construction just can’t keep up with the building permit.