Rates drop as Fed indicates no more rate hikes this year

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Published Date 3/20/2019

Four things: The Fed will not increase rates this year, the Fed will end the unwinding of its balance sheet in Sept, economic growth revised downward from the Dec projections, and lowered overall inflation based on the PCE. The Fed said it would slow the monthly reduction of its holdings of Treasury bonds from up to $30B to up to $15B beginning in May and end its run-off of the balance sheet in September. Redemptions of mortgage-backed securities would at that point be reinvested in Treasuries up to as much as $20B per month, moving the Fed generally toward a Treasuries-only approach to its assets. The Fed in the meantime will let MBSs continue to retire based on pay-offs.

As we have been noting, the Fed now agrees the economy will slow this year, most coming from slowing consumer spending and the decline in manufacturing. Finally, the Fed has come around to believing that the US economy can’t grow much given the global declines. Updated quarterly economic projections released by the Fed showed weakening on all fronts compared to the forecasts from December, with unemployment expected to be slightly higher this year, inflation edging down, and economic growth lower as well. “Growth of economic activity has slowed from its solid rate in the fourth quarter,” the Fed said in a policy statement that kept its benchmark overnight lending rate, or federal funds rate, in a range of 2.25% to 2.50%. “Recent indicators point to slower growth of household spending and business fixed investment in the first quarter ... overall inflation has declined.” Nine of the Fed’s 17 policymakers lowering their expected rate path and collectively shaving a full half of a percentage point off the expected fed funds rate at the end of this year. To not totally destroy optimism the Fed went on to say the committee said it viewed “sustained” growth as the most likely outcome.

In his press conference, Powell commented that the trade tariffs being discussed are not significant to the overall economy. Brexit has the potential to disrupt global economies. He said it would be “sometime” to adjust policies. Said the economy is in a “good place.” He also said he expects the economy will continue growing and reaffirmed what we already know, that Europe and China economies are slowing.

Tomorrow the March Philadelphia Fed business index is thought to be at 5.5 from -4.1 in Feb. Feb leading economic indicators is expected +0.1% from -0.1% in Jan. Weekly claims -4K to 225K.

Pundits all euphoric about Powell’s press conference; that the Fed has finally spoken without a forked tongue; he was direct and specific, something he or Yellen haven’t been for years.

Now, what to do; the 10 yr at 2.53% is 2 bps lower than 2.55% that has been a long term resistance, no meaning though that it is 2 bps lower than the resistance level. The longer run we expect rates have the potential to move lower. I doubt the bond and mortgage markets can add to today’s improvements tomorrow. Now looking for a little rebound; “buy the rumor, sell the fact.”

Source: Realtor, TBWS

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