The latest meeting of Federal Reserve officials came and went on Wednesday.
The meeting came and went as anticipated. Fed officials held the range on the federal funds rate – an influential overnight lending rate – at 1.5%-to-1.75%.
Credit-market participants reacted with the expected yawn. Yields on U.S. Treasury securities (and other quality debt instruments) barely budged.
No one should be surprised the market response was universal indifference. That which is anticipated rarely elicits action. Everyone anticipated the Fed to maintain the range on the fed funds rate. The Fed followed the script.
Everyone also anticipates the Fed to lift the range on the fed funds rate when officials convene again in June. Everyone expects the range to rise to 1.75%-to-2%. So when the Fed lifts the range next month, expect the market response to be similarly muted.
Words can speak louder than actions, though. The event itself, the holding or raising of the fed funds rate, will elicit indifference. The press conference following the event can move markets. A Fed official, being human, can say something that was off script and unanticipated.
No such luck this time. Fed officials held to form. Here again, everything was anticipated.
Fed chairman Jerome Powell was broadly optimistic about the U.S. economy, but he noted a few risks. (There are always a few risks.) The trade dispute China was highest among the risks. Powell mentioned that consumer-price inflation was finally running at the Fed’s designated 2% annualized rate. Wage-price inflation was a concern given low employment. Employers might need to funnel more dollars into wages to entice scarce employees. More wage-price inflation can lead to more consumer-price inflation.
As for us, it was business as usual. Quotes on mortgage rates were equally muted compared to yields on most debt instruments. Quotes on prime 30-year fixed-rate conventional mortgages continue to hold the 4.625%-to-4.75% range established last month.
Given that U.S. GDP growth was underwhelming in the first quarter, mortgage quotes should hold the range for at least the near future.
A pre-summer lull appears to have descended upon us. With what we know and with what credit-market participants anticipate, mortgage-rate volatility should remain dormant. Borrowers might be able to pick up a few basis points on a short-term float. But is the reward worth the risk? We can’t say. It’s a coin flip.
We mentioned last week why it’s worthwhile to monitor the yield curve, which has flattened over the past month. The spread between the two-year note and the 10-year note has narrowed to 50 basis points. The spread between the 10-year note and 30-year bond has narrowed to 20 basis points.
A flattening yield curve is no big deal; an inverting yield curve is. If short-term yields rise above long-term yields, take note. Inverted yield curves have preceded nine of the past 10 recessions.
Still Stuck in Purgatory
The NAR’s Pending Home Sales Index showed only marginal improvement in March. The latest reading suggests that we shouldn’t see much change in existing-home sales over the next month or two. No surprise here: low inventory driving relentless price appreciation continues to constrain sales growth in many markets.
Home inventory is unlikely to receive a boost from new construction. Bureau of Economic Analysis data show single-family-home investment running at $280 billion on an annualized rate. The number sounds big in isolation. Relatively speaking, it’s not so big. It’s roughly 1.4% of GDP, at the low end of historical percentages.
Single-family-investment is low. It’s low enough to be below the bottom of previous recessions as a percent of GDP. Home builders have had troubled getting into gear. They have been plagued with accelerating land, labor, material, and regulatory costs. That’s unlikely to change any time soon.
Many market watchers are concerned rising interest rates, including rising mortgage rates, will eventually trip up housing. We’re not one of them. The consumer market is healthy enough to absorb higher mortgage rates. The issue is more fundamental: More inventory for sale and more housing supply, in general, are needed. Until that occurs, little will change on the sales front for the foreseeable future.