First, may as well get the embarrassing part over: the Fed raised its rate today, and mortgage rates fell. “Fell” is a bit of an overstatement, the decline no more than a fractional point -- a large loan, fine credit, 80 percent, 30-year fixed still sits between 4.375 percent and 4.50 percent. Nevertheless, any drop is the biggest story of the day, as nearly everyone had expected a breakout in the underlying, all-powerful 10-year treasury note (T-note). The 10-year had, for two weeks, been flirting with the crucial 2.60 percent level, and during Chair Yellen’s press conference it has slid to 2.50 percent. Note that 2.60 percent is still crucial because there is little or no support on charts all the way to 3.00 percent. Thus when we finally do breach that level, mortgage rates may rocket toward 5.00 percent. But not today. Continuing with first things first, the Fed manipulates the “Fed funds” rate, the overnight cost of money. Longer term rates are a market f...
- If the Fed continues to push up the cost of money, sooner or later long-term rates will rise also.
- There is no rule defining the relationship between the cost of money as set by the Fed and long-term rates, but there is a persistent pattern that ends in recession -- still years away, with any luck.
- Three weeks ago, the Fed began telegraphing to markets that it was raising rates today, and markets overreacted a bit, thinking the Fed might accelerate its rate hikes in 2017.
- Instead, the Fed left its forecast for three total hikes this year unchanged, and left the levels in future years unchanged also. So markets adjusted.