I mentioned last weekend that interest rates would probably rise or hold steady in anticipation of the announcement from the Federal Open Market Committee, which is comprised of the Board of Governors of the Federal Reserve Bank, affectionately known as “the Feds.”
After a two-day meeting March 15th and 16th the Feds have decided to leave short-term interest rates alone for now, which was expected. They have also scaled back their expectations for rate hikes later in the year which was hoped for but not necessarily expected.
They believe inflation is still tame and the economy is still growing at a moderate pace.
All of this set the stock market buzzing with a big rally in stocks immediately after Ms. Yellen’s press conference. Bonds rallied, too, driving interest rates down immediately. Look at the chart to the right, and you’ll see the yield (interest rate) on the 10-year treasury bonds began rising last Thursday morning, pretty much idled Monday, rose over the course of the day Tuesday as investors started to hedge their bets, and then, immediately after Yellen’s press conference, dropped like a stone.
Mortgage-backed securities followed with a nice rally, and immediately many of our lenders started improving their pricing (albeit slightly).
Hundreds of billions of dollars moved within minutes, and billions were made. Now, tell me, who is the most powerful women in the world?
Setting that aside, now that the Feds meeting is past us the stability of the last week or so will vanish. What will happen tomorrow?
If the stocks continue marching upward figure that money will move from bonds to stocks, and interest rates will bump back up again, most likely very slightly.
However, the core message of the Feds was:
- Inflation is not a problem, in fact it’s lower than we think it should be.
- Wages are stagnant.
- Economic growth will continue, but at a very modest pace.
All in all, it was not a rosy assessment of the economy. Investors tend to react to news like this immediately to “catch the wave” and the digest the information overnight. This afternoon a lot of money moved from idling in cash to buying both stocks and bonds in a rush.
But that rarely happens. Usually money moves either from bonds into stocks, or the other way around. It is highly unlikely that money will continue to move into both tomorrow. Since the overall picture of the economy was just slightly better than bleak, I would think it more likely money will move into bonds tomorrow than stocks. If so, you’ll see underlying rates improve a lot, and retail rates improve very slightly. If it holds next week, we could see an excellent opportunity for another dip in rates.
This article represents the opinion of Casey Fleming, and not necessarily that of C2 Financial. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial, have any magical insider information about bond markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial are responsible for decisions that you make regarding your own choices about your mortgage or those of your clients.