As expected, this week's FOMC meeting has adjourned with no change to key short-term interest rates. However, there were some surprises in the release that have caused afternoon volatility. Standing out the most is an expectation of two rate hikes by the end of 2023 when the general consensus was changes would not be made until 2024. The earlier timeline indicates the Fed feels the economy is rebounding from the pandemic better than previously thought.
Also worth noting were the revised economic projections that showed they are predicting this year's GDP will finish at up 7.0%, which was an upward revision from March when they estimated 6.5%. Furthermore, their inflation predictions have it growing at a faster pace than previously announced.
A bit of good news was their unemployment prediction was unchanged from 4.5% for the end of this year and a reiteration to continue their current bond buying program at $120 billion per month.
Overall, as feared, the bond market is reacting negatively to this afternoon's events. The bond market is tanking after the announcements, currently down 21/32 (1.55%). This should cause an intraday increase to mortgage rates of approximately .375 of a discount point. Stocks are also in selling mode with the Dow down 263 points and the Nasdaq down 94 points.
May's Housing Starts was posted at 8:30 AM ET this morning, revealing a 3.6% increase in new home groundbreakings. That was a bit stronger than expected, but not enough to draw much attention to what is considered to be a minor economic report. Accordingly, we have not seen a reaction to the news.
Tomorrow morning brings us two minor economic reports, starting with last week's unemployment figures at 8:30 AM ET. They are expected to show that 350,000 new claims for unemployment benefits were filed last week, down from the previous week's 376,000 initial filings. The higher the number of new claims, the better the news it is for bonds and mortgage rates.
May's Leading Economic Indicators (LEI) will close out this week's calendar at 10:00 AM ET tomorrow. The LEI is a Conference Board release that attempts to predict economic activity over the next several months. Therefore, a decline would be good news for the bond and mortgage markets.
©Mortgage Commentary 2021