07/29/2024
"The July Fed Meeting. The begins their official two-day Federal Reserve Open Markets Committee (FOMC) meeting tomorrow. The Fed will issue a press release at 2:00 ET on Wednesday followed by a live press conference with Fed Chairman Jerome Powell at about 2:30 ET. The markets are not expecting that the 12 Fed members will vote to cut the Fed Funds rate in this July meeting, but the markets will be very interested to see if the Fed’s official communications to the markets are more optimistic than previous meetings with the timing of future rate cuts. The markets will literally be comparing every word of the Fed’s written press release to prior press releases to see if there is even a subtle shift in the Fed’s messaging to the markets.
As of today, the Fed Futures market is predicting just under a 5% chance of a Fed cut being announced this week, over a 100% chance of a cut of 25 basis points being announced in September, an 88% chance of a of a second cut in November and more than a 100% chance of a third cut announced by January.
As a reminder, the Fed directly controls the Fed Funds rate, which is the rate for 1-day loans made between banks who are members of the Federal Reserve system. Usually, banks who hold more cash reserves than are required by the Fed at the end of each day will lend these excess funds to other banks who may be short of their required level of cash reserves at the end of each business day. These are literally overnight loans made at the end of each day and paid back the next morning. As the Fed raises or lowers the rate on these short-term loans, this directly impacts a bank’s short-term cost of funds, and this usually results in a bank changing the rate they charge for consumer and business loans. Most HELOC loans are tied to the Prime index which is directly impacted by the Fed Funds rate.
The reason that the above is important to us in the mortgage industry, is that these Fed votes to change the Fed Funds rate do not directly impact mortgage rates which are more driven by the daily change in MBS prices. However, the Fed’s decisions do influence the overall level of interest rates in the economy and the Fed’s decisions to cut rates tells the markets that the Fed thinks inflation will stay under control, which has a significant impact on long-term bond prices, such as MBS. The key point is that MBS prices will generally improve before and after the date that the markets predict the Fed will do a rate cut, not just on the actual date itself, like the Prime Index does.
The billions of dollars of Fed Futures contracts which are predicting three Fed rate cuts by January should cause MBS prices to generally improve over the next six months, as long as nothing happens to cause the Fed Futures market to lower these probabilities."
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
