Fed Spooks Markets, Rates Edge Higher

Interest rates for buying a home on the Palos Verdes Peninsula edge downward this week. The following are excerpts from the newsletter on interest rates published by HSH Associates :

"Recently, we've found ourselves in the middle of a lukewarm economic period and at a time when inflation, if firming, isn't much to talk about, and financial markets have been fairly quiet. In turn, this has allowed interest rates to bump along recent bottoms, but into this quiet came a bit of a surprise for the markets this week in the form of a central bank that seems likely to actually lift short term rates before too much more time has passed.

To be fair, this shouldn't have been all that surprising, but the minutes of the April meeting contained what seems to be a more "hawkish" tone than that which was presented in the statement which closed last month's meeting. Although offered with plenty of caveats, the minutes noted:

"Most participants judged that if incoming data [on growth, inflation and labor markets] were consistent with economic growth picking up in the second quarter [...] then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June." This was by no means a unanimous stance -- there were plenty of "if" and "whether" concerns about these items from FOMC members -- but "most" likely means a majority is leaning in this direction.

The Fed also rightly worried that "market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond"; In recent days, several Fed speakers and regional bank presidents have made it clear that June is "on the table". Given the reaction on Wednesday and Thursday, it's clear that markets weren't prepared for this kind of message, let alone a rate hike. As such, mortgage and other interest rates initially bumped higher, but have since settled back a bit.

Markets got a little spooked by the fairly candid and direct message in the Fed's April minutes this week, as they largely contrasted with the statement that closed that meeting. No one should be surprised that the Fed is champing at the bit to raise rates; it has made its intentions as clear as it can for a good while now, but the data simply hasn't been such as to support a move.

Conditions are changing, though, and we may soon approach a place where the Fed feels comfortable in making a move. Could that be June? Possibly. There is quite a bit more data that will become available before the next Fed meeting on June 14 and 15, but even if they do give that date a pass, it won't take much to see a July move looming in the windshield.

We have some time before that comes, though, and even though mortgage rates have firmed a touch this week and will probably do so again next week, rates aren't even as high as they were in March (and won't be next week), let alone challenging 2016 "highs" of just above 4 percent.

There's some more data out to chew on next week, including new home sales, durable goods orders, an update to first quarter GDP and final May consumer sentiment reports. A mild uptick in rates is expected, something in the neighborhood of 4-5 basis points"

 The following are interest rate quotes from American California Financial: