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Another Fed Rate Hike

Overview: Over the past week, the only significant market-moving news was the Federal Reserve meeting, and even this event had only a minor net effect on mortgage rates. The economic data released this week had little impact, and rates ended slightly lower.


As widely expected, the Fed raised the federal funds rate by 25 basis points on Wednesday. The statement released after the meeting contained no surprises, and this outcome was viewed favorably by investors. The Fed modestly increased its forecast for economic growth in coming years and slightly raised its expectations for the federal funds rate over the long-term. Most investors think that the Fed will hike rates again at the meeting in December. The lack of more hawkish language (meaning in favor of tighter monetary policy) was enough for investors to push mortgage rates a bit lower.

Current economic conditions, including record highs in the stock market, a solid labor market, and faster wage increases, have boosted the optimism of Americans. The latest reading of consumer confidence revealed an unexpectedly large increase to the highest level since September 2000. In similar fashion, weekly jobless claims dropped to the lowest reading since 1969. Despite all the good news, though, home sales have been somewhat of a laggard this year, mostly due to a lack of inventory.

After four straight months of declines, sales of previously owned (existing) homes were flat in August. The inventory of existing homes for sale was also flat from July at a 4.3-month supply, which is well below the level viewed as a healthy balance between buyers and sellers. A small bright spot was that inventory was a little higher than a year ago, which marked the first year-over-year increase in about three years.

Week Ahead

Looking ahead, the Durable Goods report, an important indicator of economic activity, will come out on Thursday. The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will be released on Friday. The Institute for Supply Management (ISM) Manufacturing Index will come out on October 1, followed by the ISM Services Index on October 3. The next Employment Report will be released on October 5.

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