After holding the federal funds rate near zero for seven years, the Fed announced on Wednesday a widely expected rate hike of 25 basis points. According to the Fed statement, there has been "substantial improvement" in the labor market, and the economy is on a path of "sustainable improvement." Regarding future policy, Fed officials expect that economic conditions will warrant only "gradual" increases in rates. The statement also noted that the Fed does not expect to reduce its holdings of MBS and Treasuries any time soon. This is the canary in the coalmine; the Federal Reserve has been purchasing mortgage backed securities (MBS) for the better part of a few years, they are also reinvesting the proceeds received when those securities they have purchased come due. This saps the supply of of mortgage securities on Wall Street, driving up demand, which in turn, keeps mortgage rates low. The day of reckoning will come when the Feds. announce they are no longer purchasing or reinvesting in MBS. Until that day comes, I expect mortgage rates to stay in a tight trading range of 4% - 4.5% even in the face of future hikes in the fed funds rate.
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