Market Reacts Pre-Fed

Typical Pre-Fed Jitters

Typical Pre-Fed Jitters

Seems like it happens often when a meeting of the Federal Reserve Board is coming. The markets analyze all the data, and declare that the rate hike is not likely. Then the closer we get to the meeting, the more the markets get jittery by thinking that a rate hike may take place anyway. This seems to be what happened to the stock and bond markets starting just under two weeks before the meeting, with stocks taking a dive while interest rates increased.

Why do we say that this is just market jitters, and not for some other fundamental reason? Because on a typical day in which stocks go down, interest rates will also decrease. For example, if there were a major economic or political shock across the globe causing stocks to tumble, investors would be buying bonds as a safe haven. Thus, we believe that we have typical “pre-Fed meeting” market nervousness. The good news about this nervousness? Often the markets recover even before the meeting takes place, though sometimes the recovery takes place afterwards.

What if the Fed does raise rates? Then it is possible that the markets may rebound a bit because they have already taken this action into account. Keep in mind two things: First, the markets continue to believe that the rate hike is less probable — even though there is some concern because the Fed is not likely to act at the next meeting which is right before the election. Second, even when the Fed raised rates in December, the markets recovered quite nicely, even after a rough start to the year. Thus, just because the market’s jitters are based upon reality, this does not necessarily preclude a good finish to the year.

The Weekly Market Update

Rates rose in the past week, moving slightly over a level not seen for the past three months. For the week ending September 8, Freddie Mac announced that 30-year fixed rates were at 3.50%, moving up from 3.44% the week before. The average for 15-year loans rose one tick to 2.77% and the average for five-year adjustables also increased one tick to 2.82%. A year ago, 30-year fixed rates were at 3.91%, almost one-half of one percent higher than today's levels.

Attributed to Sean Becketti, Chief Economist, Freddie Mac --"The 10-year Treasury yield rose 18 basis points to 1.73 percent, its highest level since Brexit. The rate on 30-year fixed-rate loans followed suit, rising 6 basis points to 3.50 percent this week. This is the first week since June that 30-year rates were above 3.48 percent, snapping an 11-week trend."

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.