The Anticipated Rate Cut is in the Bag

Yesterday’s announcement from the Federal Reserve called for another 1/4% rate cut to the Fed Funds Rate. This expected move had a relatively small impact to mortgage interest rates, as investors had clearly already priced into the market the cut before it occurred. The good news is that mortgage bonds have made steady gains the past few days and have broken out of the nasty trading channel that drove mortgage interest rates higher over the last few weeks. In fact, there is now a trading channel forming in the opposite direction. If this channel has the strength to drive prices above their 50- and 25-day moving averages, we could potentially see mortgage interest rates be back in the range they were back in August. However, that would be an exception to the rule. Generally, a tough ceiling would cause any rally to at least stall. So, don’t expect too much to happen in the short run.

In the speak by Fed Chairman Jerome Powell, it was reiterated that the Fed believes the US economy remains strong and that they do not foresee a recession. When you consider that just prior to the 2008 financial collapse, the Fed estimated the odds of a recession at less than 20%, the Fed has a terrible history of making prediction. This is completely understandable. It is hard to see things turning negative at a time when everything is performing so well. However, that is exactly the time at which the Fed should be concerned. Things generally peak and then fall. The most difficult part is predicting the peak. Are we there yet? Well, since we are already in the longest expiation period in US history, it’s difficult to say. But we do know that at some point things will change. Should you pull yourself out now or keep in the market in hopes of taking advantage of the strong economy? That’s the question each should ask.

If bonds break above the ceilings, we will change to a floating bias. Until that time, the risk of floating is elevated. Only do so if you are able to closely watch the markets.