The Federal Reserve announced today that it would continue to purchase $85 billion per month of mortgage and treasury bonds. This surprised most Fed watchers as the conventional wisdom had been that the Fed would begin to taper their purchases. In fact, the recent spike in mortgage rates and gradual rise in CD rates have been largely based on the Fed making such a move. When markets are surprised, they react quickly, and that happened today.
The impact on mortgage rates was swift and significant. Rates on 30 year mortgages fell by a quarter of a percentage point during the day in response to the Fed news.
It's still early to guage on the immediate impact on CD rates but I expect the increase in average rates we have seen over the past three months is largely over for the moment.
Where do we go from here?
What happens next to mortgage and deposit rates depends entirely on the economy. The Fed decided to continue its level of bond purchases because it believed the economy was not growing as fast as it had initally forecast.
The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.
The culprit - rising rates, engineered by expectations that the Fed was going to cut back. Talk about the cart leading the horse.
If economic news comes out stronger than expected than expectations will grow that the Fed will cut back at their net FOMC meeting and rates will begin to rise again. If the economy underperforms, then the market will expect the Fed to keep buying and mortgage rates will stabilize while CD rates remain flat or begin to fall again.
The bottom line though is that we have, for now, gone from a rising rate environment (as feeble as it the rise was) to a flat-rate environment. Plan accordingly.