Fed Lowers Forecasts

The big story this week was Wednesday’s Fed meeting, and the Fed statement was well received by mortgage investors. Also positive for mortgage rates, the economic data released this week fell short of expectations. As a result, rates ended the week lower.

For several reasons, the Fed statement caused investors to push expectations for federal funds rate hikes farther into the future. First, Fed officials raised the requirements which would justify the first rate hike. According to the statement, Fed officials want to see further improvement in the labor market and want more confidence that inflation will reach their target rate of 2.0% before beginning to raise rates. Second, Fed officials lowered their outlook for economic growth and inflation over the next three years, meaning they expect it to take longer to meet these requirements. Finally, they forecasted a slower pace of rate hikes once the rate hikes begin. Mortgage investors were pleased by the prospect that rate hikes are farther away and will take place at a more gradual pace.

The economic data released this week was consistent with the Fed’s view of slower economic growth. Housing Starts dropped 17% in February, and February Industrial Production fell short of the consensus. Unusually bad winter weather was a major factor behind the weak data, and pent up demand could boost the results in coming months. In any case, slower economic growth reduces expectations for future inflation, which is good for mortgage rates.