Mortgage rates will tick up after Fed Chair Powell sent a strong signal that a December rate cut—that markets have already priced in—is far from a foregone conclusion.
Rates will rise today even after the Fed cut their policy rate by 25 bps. Markets had fully priced in both today’s cut and a December cut, but Fed Chair Powell said today that the December cut may very well not happen.
- In his press conference, Powell highlighted division on the committee about the future path of rates. Today’s rate cut only had two dissents, one for no cut and one for a 50 bps cut, but the tone of Powell’s remarks showed that he wanted to send a forceful signal to markets to re-price expectations for December. When the Fed simply wants to leave itself wiggle room, they will say that “policy is not on a pre-set course.” This was a clear effort from the Fed to change expectations for the final meeting of the year.
- Today’s remarks are consistent with the general view that the worst of the labor market risks may have passed. In other words, since the summer, the economy has been weak, but it seems to have stabilized. In that context, the Fed questioning whether there needs to be a third cut, after two consecutive cuts, makes sense.
The Fed is showing a clear desire to “slow down” in the midst of “foggy conditions,” since the government shutdown has stopped the flow of economic data.
- The lack of government data, particularly labor market data, creates a high level of uncertainty for the Fed. That uncertainty will continue even if the government re-opens, because data collection has not happened for October. In the void, Fed officials are relying more on alternative data, but are mindful that it’s not a replacement for the gold standard government statistics.
- Chair Powell’s press conference remarks make it clear that many on the Federal Open Market Committee (FOMC) view not cutting as the safer course of action in the face of higher uncertainty.
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