After the Fed’s announcement, mortgage rates fell dramatically
Incredibly, mortgage rates have continued to rise at a dizzying rate over the past several days, even though they were already at their highest levels in almost a decade before the surge began. The average lender’s offer for a top-tier 30 year fixed rate mortgage increased from 5.55 percent on Thursday to 6.28 percent yesterday afternoon.
Last week’s major inflation report, the Consumer Price Index (CPI), showed prices growing faster than predicted, setting the stage for the unfolding drama. The Federal Reserve Board’s primary focus in 2022 will be on containing inflation, which is the primary rationale for the Board’s increasingly aggressive efforts to raise interest rates.
However, the excitement we experienced would not have been worthwhile if CPI had been the only factor. The financial market has been in a state of panic for the past few days because of the anticipation of a Fed announcement on Wednesday and the Fed’s customary “blackout period.” The Fed does not issue any statements about monetary policy during the blackout period. In other words, the market was left to speculate wildly as to how the Fed would react to the CPI report.
The market’s wild speculation seemed to have been rather accurate when we finally heard from the Fed today. Fed Funds Futures accurately forecasted a rate hike by 75 basis points, so that is exactly how much the Fed increased its policy rate (tradeable contracts that allow markets to bet on the level of the Fed Funds Rate). Furthermore, the early reaction in bonds was somewhat neutral.