The median Fed member now sees the Fed Funds Rate at 4.625% by the end of 2024 as opposed to the 5.125% conveyed in September’s dot plot. This was clearly better news than the market was expecting because here’s what rates did when it came out:
The behavior of 2-year Treasury yields is closely tied to the Fed Funds Rate expectations in the near-term. On the other hand, 10-year yields tend to move more in line with mortgage rates. Speaking of mortgage rates, they experienced a significant shift over the week, although you may not have noticed it if you only looked at the weekly surveys. The actual daily averages, such as the Mortgage News Daily index, reflect the substantial drop that occurred in the second half of the week.
Lower Mortgage Rates
The MND index has experienced the biggest five-week drop on record, surpassing the bigger falls seen in the 1980s by Freddie Mac’s rate index. The 5-week change in rates can be seen in the chart below. This drop, which started in November, is the largest we have witnessed in decades, although it is only slightly larger than the drop observed last year.
In addition to the dot chart plot, Fed Chair Powell mentioned that the Fed had begun to discuss rate cuts. It’s important to keep in mind that Powell has also been clear that the Fed could actually hike rates again if inflation were to pick back up. He’s also been clear in saying that inflation would need to keep moving lower in order to make rate cuts a reality. As far as this week’s Consumer Price Index (CPI) data was concerned, we’re on the path, but still far from the destination.
We won’t get CPI again until the new year. Moreover, we won’t get much by way of other relevant economic data before then either. Combine that with the typical decline in trader participation in late December, and it’s not unfair to say the jury is pretty much out for the next few weeks. Rates may ebb and flow a bit, but the important decisions are on hold until big-ticket data and more robust participation return after the holiday break.