All Things in Moderation

Vital Statistics:

We have green on the screen as investors rejoice over the FOMC statement. Bonds and MBS are up.

As expected, the Fed maintained interest rates at current levels, and signaled the tightening cycle is finished. Bonds and MBS are up, with the 10 year bond yield trading below 4%.

As expected, the Fed maintained the Fed Funds rate at current levels, and pointed out that the economy is slowing:

Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter. Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

The U.S. banking system is sound and resilient. Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks

The dot plot showed the Fed expects the 2024 Fed Funds rate to be in a range of 4.5% – 4.75%, which is a sizeable drop from the September forecast of 5% – 5.25%. Note that 2025 and 2026 have been revised lower as well.

2024 GDP forecasts were trimmed from 1.5% to 1.4%, while the unemployment rate is expected to remain at 4.1%. PCE inflation estimates were lowered a hair to 2.4% on both the headline and the core rate.

The reaction in the bond market was dramatic, with the 10 year bond yield falling 15 basis points on the day and the 2 year falling 25 bps. The stock market also took off as investors bet on a soft landing.

The press conference more or less re-iterated the info from the statement, however Powell did signal that this tightening cycle is over:

While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate. We are committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective.

When asked about why the Fed is stopping before inflation hits 2%, Powell said that waiting for inflation to hit the target before easing would mean overshooting.

The Fed Funds futures became even more dovish, with the central tendency predicting six rate cuts in 2024. Check out the difference in probabilities between yesterday and a month ago. Amazing.

This statement should be good news for the mortgage space overall, as it will be supportive for MBS spreads. Volatility in the bond market should dissipate as uncertainty over Fed policy ends. The big agency mortgage REITs spiked 5% on the Fed announcement. Mortgage originators also rose, with Rocket rising 9.5% and United Wholesale rising 7.5%. Interestingly, Mr Cooper (which is a big MSR play) only rose 2.4%.

Bottom line: 2024 might be a bit better for the mortgage space than people thought a couple months ago. I suspect the MBA will be taking up estimates for 2024 soon.

In other economic news, retail sales rose 0.3% month-over-month topping expectations, while initial jobless claims fell to 202k. Cue the chorus calling for a Goldilocks-esque soft landing.

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