Fed Balancing Act

Concerns about the banking sector in the US and Europe caused investors to continue to shift to relatively safer assets, which again was favorable for mortgage markets. The Fed more or less stuck to the anticipated script at its meeting and the market reaction was minor. As a result, mortgage rates ended the week lower. 

Due to the recent troubles in the banking industry, the Fed meeting on Wednesday was even more highly anticipated than usual. Investors were eager to see how the Fed would balance its conflicting objectives of bringing down inflation (requiring tighter policy) and helping support the banks (requiring looser policy). As expected by most investors, the Fed raised the federal funds rate by 25 basis points to a target range of 4.75% to 5.00%, the highest level since September 2007. The latest projections from officials for the terminal (peak) rate remained near 5.10%, indicating that they anticipate one more 25 basis point hike before concluding this tightening cycle.

Beyond that, they essentially said that they will continue to do whatever is necessary to bring inflation back down to its target level of around 2.0% annually and to maintain stability in the banking system. In short, the Fed chose to preserve its flexibility in making future policy decisions. Finally, Chair Powell explained that banks would likely be more selective now, leading to fewer loans to businesses and consumers. According to Powell, it is too soon to tell how much tighter lending standards will slow economic growth, but it could "easily have a significant" effect. 

After reaching a record high of $413,800 in June, the median existing-home price was down to $363,000. This was 0.2% lower than last February, the first year-over-year price decline since 2012. New home sales, which account for the remaining 10% of the market, matched expectations with a small increase from January.

Investors will be keeping a close eye on the banking sector to see if troubles spread to other institutions. They will also monitor if Fed officials elaborate on their plans for future monetary policy. It will be a light week for economic reports. Consumer Confidence will come out on Tuesday. Personal Income and the core PCE price index, the inflation indicator favored by the Fed, will be released on Friday.