What If The Fed Did Not? The Weekly Market Update

What If The Fed Did Not?

Alternative Reality

No, we are not delving into the world of science fiction. We can’t change what happened. But sometimes it is interesting to wonder what would have happened if an event did not take place. In this case, we are referring to the Federal Reserve Board raising short-term interest rates. As we have previously explained, the move was a “no-brainer.” The markets were surely expecting the increase. Therefore, it would have been a surprise if the Fed held rates steady.

The markets don’t like surprises. And a layman might have surmised that rates would have come down if the Fed kept rates where they are. Yet, that conclusion is not necessarily accurate. If the markets feel that inflation is becoming more of a threat and the Federal Reserve is not doing its job to rein in inflation, then long-term interest rates could move up even faster than they have already risen. This is why the Fed can raise interest rates at times and long-term rates can actually go down — though presently short-term rates have not gone up high enough for the analysts to predict that they will halt economic growth.

More evidence on the state of the economy is on the way. This week we have a report on personal income and spending, and next week we will see another jobs report. Coming after a strong report for February’s data, you can be sure that market analysts and the Fed will be watching closely for evidence that the economy and inflation are heating up. If we see that evidence, there will be speculation that another rate increase will be coming sooner, rather than later. A disappointing jobs report could make the Fed pause and ponder whether they are moving too quickly. That would be bad news for the economy, but good news for rates.

The Weekly Market Update

Rates bounced back down in the past week, not unusual for a week after the Fed raises rates, because the markets had moved up in anticipation of the action and there were no surprises. For the week ending March 23, Freddie Mac announced that 30-year fixed rates fell to 4.23% from 4.30% the week before. The average for 15-year loans decreased to 3.44%, and the average for five-year adjustables moved down to 3.24%. A year ago, 30-year fixed rates averaged 3.71%.

Attributed to Sean Becketti, chief economist, Freddie Mac -- "The 10-year Treasury yield fell about 10 basis points this week. The average rate on 30-year fixed loans moved with Treasury yields and dropped 7 basis points to 4.23 percent. This marks the greatest week-over-week decline for the 30-year rate in over two months, a stark contrast from last week's jump following the FOMC announcement."

Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.