The Fed could raise short-term rates next Wednesday
Although bank failures are the main focus of attention, the Federal Open Market Committee will consider Tuesday’s Consumer Price Index report. This will influence any short-term rate increase decision. Kushi stated that a pause could allow the Fed to assess the risks to the banking system. “But, Jerome Powell implied that inflation was the public enemy No. 1. It is not clear if the Fed will stop raising rates after recent bank failures. CoreLogic’s chief economist, Selma Happ, said that inflation concerns outweigh the SVB developments for Fed. Happ stated that recent developments had shifted the likelihood of a rate hike, either no or a smaller 25-basis point rate increase at next week’s FOMC meeting. “Despite this, the Fed chair’s fear that they will lose the fight against inflation means the policymakers will continue relying heavily on recent data points. This includes the robust job growth and will continue to search for data points that support the need for more aggressive actions. It all depends on the U.S. banking sector stabilizing after this shock. Happ said that if it doesn’t, it is unlikely that the Fed will tighten further. “Mortgage rate may remain in the 6.5% range because investors’ price in a pullback in further tightening.” The 10-year Treasury yield is a guideline for mortgage rates. However, investors may price in a pullback in tightening. Fratantoni said that mortgage rates could remain in the 6.5% range. So I don’t think so, and I wouldn’t expect them to do that now. He believes that slowing down or stopping the balance-sheet run-off could be another tool the Fed could use if conditions get worse. This is 50 basis points lower than the March 9 high of 4.022%, the day prior to the collapse of Silicon Valley. This is where it was for most January. Things were looking up for the markets and homebuilders back then, Fratantoni noted. He also noted that January’s bank failures had created a different environment. The MBA economics team forecasted that the spread between the 10-year Treasury Treasury and 30-year FRM would narrow to 180 basis points, from the current range of 280 basis points to 300 basis point. Fratantoni stated that the spread could stay wider because of the disruption caused bank failures. “So even though 10-year Treasurys have fallen, mortgage rates may not fall as quickly as they did in January. According to Zillow’s rate tracker, mortgage rates fell 41 basis points between March 9th and Monday to 6.37%. This could be due to normalization of inversion between conforming 30-year FRMs (and their jumbo counterparts). The MBA’s Weekly Application Survey revealed that jumbo rates were 50 basis points lower than conforming loans for much of the past year. This is because banks are trying to attract borrowers for other products. Fratantoni stated that banks may still be willing to lend conforming loans at prevailing rate, but may not be as eager to expand their balance sheet with large loans in a world where the bank balance sheet space is becoming more scarce and more expensive to finance through deposits. Anything that would decrease the liquidity of bank balances sheets will likely be subject to more regulator scrutiny.