Wednesday’s Fed meeting was viewed as more hawkish than expected, which was negative for mortgage rates. Recent economic data had little impact. As a result, mortgage rates ended higher.
While the Fed did announce a major policy change (see below) in Wednesday’s statement, this had been widely expected by investors for months and caused little reaction. Investors were much more focused on the Fed’s outlook for future federal funds rate hikes. Roughly 75% of Fed officials forecasted one more rate hike this year and three rate hikes in 2018. Investors were a little surprised by the high level of support for this rapid pace, and mortgage rates moved higher after the release of the statement.
As expected, the Fed provided the final details on its plan to reduce its holding of Treasury bonds and mortgage-backed securities. Beginning in October, it will no longer reinvest $10 billion of principle payments received on its holdings. The monthly amount will remain $10 billion for three months and then will ramp up by $10 billion per month each quarter thereafter. When this amount reaches $50 billion per month, it will remain there for the duration of the program (which has not yet been announced). The only new information about the plan was that it will begin in October.
The most significant economic report released over the past week fell well short of expectations. Retail sales in August fell 0.2% from July, below the consensus for a small increase. One reason was that auto sales declined sharply in August, partly due to Hurricane Harvey. However, a huge number of vehicles have been destroyed by the recent hurricanes, which should lift auto sales in coming months.
Looking ahead, the New Home Sales report will be released on September 26. The Durable Goods report, an important indicator of economic activity, will come out on September 27. The core Personal Consumption Expenditures (PCE) Price Index, the inflation indicator favored by the Fed, will be released on September 28. In addition, there will be many Fed speakers during the week, including Fed Chair Janet Yellen on September 26.