20 Feb Markets Await Fed Meeting Minutes
Both stocks and bonds started the day relatively flat, as markets await the release of the Federal Reserve Meeting Minutes from their January meeting. Historically, the bond market hasn’t performed well following prior releases. However, now that there are clear changes in the longer-term outlook for the U.S. economy, we could see bonds improve upon the release. If Fed members have a softer tone to their statements, that would be good news for the longer-term outlook of mortgage interest rates. When you consider that very few predicted mortgage rates being as low as they are now, this is truly a gift for those considering purchasing a home, as well as to those who closed a mortgage in recent months when interest rates were higher. The key lesson is to always consider paying zero to very little in closing costs when getting a mortgage. I suggest a no cost loan in most cases. Historically, that has proven to be the best strategy.
One of the key points of interest in today’s Fed Meeting Minute release is the planned reduction in the Fed’s balance sheet. In what could be the biggest policy reversal in many years, the Fed could announce a slowdown in the pace of reducing its holdings of mortgage backed securities and U.S. Treasuries. So rather than let bonds roll off their balance sheet, they could choose to reinvest assets that are matured or paid off back into new purchases. It was Quantitative Easing that helped drive mortgage interest rates lower for the past number of years. This would be a smaller scale version of QE and could once again cause rates to fall. In the long term, this would be helpful for the real estate and stock markets.
There is limited room for mortgage interest rates to improve before hitting resistance. We will suggest floating into the Fed Meeting Minute announcement. However, if the market has an adverse reaction to the report, we will quickly switch back to a locking bias.