Daily Quote: Discipline is the bridge between goals and achievement. - Jim Rohn
(Note: If you don’t know Jim Rohn’s teachings you’re probably not the best version of your professional self.)
The Fed Giveth and the Fed Taketh Away…
The Fed raised rates yesterday and reiterated their desire to increase the Fed Funds target an additional two times this year if economic activity continues at its current pace. I know…old news and something you’re already aware of. But what you might not be aware of, and what’s critically important to interest rates from now until the Fed’s next meeting in June, are the following 4 items and please pay close attention to #4:
- Forecast: The Fed’s median forecast for economic growth this year (i.e. GDP growth), what they call the “Dot Plot”, remains at a muted 1.8%. This is far from the 3% growth target the Trump administration is aiming for.
- Inflation: Their inflation estimates remain within an acceptable range (~2%) which means they don’t foresee any real chance in price instability. (Granted they leave out everything you need to eat, drive and heat your home but that’s another story)
- Approach: The Fed doesn’t much care about rhetoric coming out of DC in terms of tax cuts and deregulation which will spur economic activity. They look forward to it happening but they’re waiting to see the whites of the eyes of legislation before considering it as a factor to increase rates further.
- Purchases: In my limited opinion the single most significantly good thing which came out of the Janet Yellen’s press conference was the discussion around whether they would maintain their purchase of Treasury and Mortgage-Backed Securities. For those who aren’t aware the Fed has about $4.2 Trillion (Yes…trillion with a T) Treasury and MBS on its balance sheet. Each month some of these securities mature, pay down principle and kick off interest. The Fed has been reinvesting these monthly cashflows back into the same securities they own. This helps keep a strong bid in both Treasury and MBS markets (meaning it helps the Mortgage Participant and Borrower). If the Fed were to stop reinvesting, or Heaven forbid if they decided to begin liquidating this huge position, it could have disastrous consequences for our markets. In essence, the Taper Tantrum of 2015 would look like a walk in the park compared to this. So although most Folks aren’t looking at this closely I’m here to tell you this is as important as it gets. Luckily, thankfully, fortunately, happily, mercifully, gratefully, appreciatively (I think you get the point) the Fed seems content to continue their current practice of holding their portfolio AND reinvesting interest and principle repayments.
So What Does This Mean For Mortgage Participants?
We wait until we get closer to the June FOMC meeting and keep our eyes on items which we know the Fed is looking for. Inflation, growth, global concerns and legislation which can change the Fed’s “Dot Plot” and therefore effect monetary policy. I promise you that if you all focus on originations and providing exceptional service to your internal and external customers I’ll do the more tedious work of making sure we’re ready for any eventual change in the operating environment. Deal?