21 Sep Ongoing locking bias
As anticipated, the Fed left interest rates unchanged and will begin the process of reducing their balance sheet beginning in October. Quantitative Tightening, as it has been branded, is essentially the unwinding of the massive Quantitative Easing program that helped drive mortgage interest rates lower in recent years. Now that the program will be unwound over the coming years, this will add upward pressure to mortgage interest rates as the markets work in reverse of what we had become accustomed to. However, the good news is that it will be a controlled and slow unwind that should reduce the $1.8 trillion of mortgage bonds the Fed now has in their portfolio over the coming seven or more years.
If the U.S. economy performs as the Fed anticipates, most Fed members believe we will see a rate hike in December, followed by three more in 2018. This is a slower pace than original anticipated. However, given the stubbornness we have experienced with slowing inflation, even this may be overly aggressive. The Fed needs for the Fed Funds Rate to be higher so they can reduce rates when we hit the next recession in the United States, which is now overdue. Given the typical economic cycle, we would anticipate a slowing in the stock market as well as the employment market as they begin to restrict. Although this sounds completely unlikely given the current economic strength, there are many triggers that could lead to a recession in the coming year or so.
Mortgage bonds have broken beneath a critical layer of support and continue to fall. Unfortunately, we are seeing mortgage interest rates inch higher. As a result, we will maintain our ongoing locking bias.