The Federal Reserve met this past week and held rates steady for the 6th consecutive meeting. Let's discuss what was said and how the market reacted going into next week.

"Lean on me, When you're not strong, And I'll be your friend " - Lean on Me by Bill Withers.

"I think it's unlikely that the next policy rate move will be a hike."

Fed Chair Jerome Powell.

The Fed Meeting

Last Wednesday, the highly anticipated Fed Meeting took place and with inflation potentially reaccelerating, there were fears the Fed might have to hike rates again.

The good news, as evidenced by the quote above, Mr. Powell led the financial markets to believe that there will be no more rate hikes and the next move will indeed be a rate cut.

This was soothing to the markets that were worried that Powell would signal a potential rate hike.

"In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective." FOMC Statement May 1, 2024.

While the Fed said a rate hike is not likely, he also shared that a rate cut is not likely to happen in the near-term either. Until the Fed sees inflation move sustainably towards 2.00%, we should not expect a rate cut in the near-term. The bond market was OK with this, and rates improved. Why would rates improve if the Fed signaled no cut just yet?

The markets see the Fed is serious about bringing inflation back down to its goal of 2.00%. This is good for protecting the value of long-term bonds, like mortgages as inflation erodes its value. If inflation continues to moderate, it will help long-term rates moderate as well.

"Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion." FOMC Statement May 1, 2024.

This announcement was also embraced by the markets as the slower pace of supply of bonds coming into the market can help put downward pressure on interest rates.

Treasury to Sell Less Debt in Q2

Possibly having a bigger impact on rates than the Fed, was the Treasury's announcement that they will not need to sell many more bonds in the 2nd quarter to help fund the government.

This was good news for bonds and rates. Why? Bonds hate more bonds. When the Treasury must sell more and more bonds to fund the government it puts downward pressure on prices and upward pressure on yields. So, this was good news for bonds.

4.70%

As the week was drawing to a close, the 10-yr Note remained beneath 4.70%, which has been a ceiling preventing yields from moving higher. Seeing the 10-yr remain beneath this ceiling after the Fed Meeting was a good sign and could start signaling a peak in rates for 2024.

Bottom line: Interest rates are trying to find a peak and getting past the Fed and this Treasury announcement was a nice hurdle as we move deeper into Spring. While we don't expect much more of an uptick in rates, we should also not expect much improvement either.

Looking Ahead

Next week the Treasury Department will be selling a lot of debt. It will be interesting to see what the buying appetite for bond auctions will be now that the Fed has calmed markets a bit and they will be slowing balance sheet reduction come June. There will also be a lot of Fed speakers hitting the pavement and sharing their thoughts. Will some say rate hikes are on the table?

Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.

If you look at the right side of the chart, you can see how prices have bounced off the lowest levels of the year. Next week's auctions and Fed speak could influence whether the current bounce can be sustained.

Chart: Fannie Mae Mortgage Bond (Friday May 5, 2024)

Economic Calendar for the Week of May 6 - 10