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Fed Policy Changes Coming

Over the past week, investors were focused on Wednesday’s Federal Reserve meeting. Mortgage rates fell ahead of the meeting, but rose following its conclusion, and ended the week just a bit lower.

As expected, the Fed confirmed that the first federal funds rate increase since December 2018 is likely to take place soon and that additional rate hikes will follow. Investors anticipate that the first increase will happen in March. In addition, the Fed intends to reduce its massive holdings of Treasuries and mortgage-backed securities (MBS). Trillions of dollars of bonds were purchased since the start of the pandemic to help the economy recover, and the Fed feels that it should begin to scale back its holdings closer to the levels seen prior to the pandemic. While no specific guidance was provided on the timing of these changes, comments from Fed Chair Jerome Powell were more hawkish (in favor of tighter policy) overall than expected. Since a reduction in demand for bonds from the Fed would be negative for MBS markets, mortgage rates rose a little after the meeting.

Existing-home sales, which make up about 90% of the market, unexpectedly declined in December, dropping 5% from November. This followed three strong months, however, and sales in 2021 still were 8.5% higher than in 2020, at the fastest pace since 2006. The median existing-home price of $358,000 was 16% higher than last year at this time. Inventory levels in December were down 14% from a year ago, at just a 1.8-month supply nationally, well below the 6-month supply that is considered a healthy balance between buyers and sellers, and a record-low level. By contrast, new-home sales, which account for the remaining 10% of the market, far exceeded the consensus forecast. In December, new-home sales jumped 12% from November to the highest level in nine months. In general, the pace of both new and existing sales is being dictated by the supply of homes available each month.


Existing-Home Sales (millions)

Week Ahead

Jan. 27 — Fourth-quarter gross domestic product (GDP)

Jan. 28 — Core Personal Consumption Expenditures (PCE) Price Index

Feb. 1 — Institute for Supply Management (ISM) Manufacturing Index

Feb. 4 — Employment Report


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