A 10th straight hike brought us to a 16-year high of the federal funds rate this past week as the Federal Open Market Committee approved a 25-basis point rate increase. Now, the overnight lending rate stands at 5.25%. The move was highly anticipated, and expected, but the FOMC members made a notable omission in their language announcing the hike—they took out the wording that indicated future rate hikes are likely.
The announcement was a boon for the mortgage industry on the day of the announcement as the 10-year Treasury note continued on a strong downward trend. The 10-year yield started the week at a high of 3.57% when markets opened on May 1 and ended Thursday trading at 3.35%—a 20-basis point dip that spurred a flurry of rate-lock activity.
Yields dropped because, quite simply, investors are spooked that the Fed’s move will negatively affect more banks and plunge the economy into a recession. When investors get fearful, they move their money into the relative stability of government-backed bonds, like the 10-year Treasury note, which drives price up and drives yields down.
A day before the Fed’s announcement, yet another major bank was taken over by the FDIC and then sold to J.P Morgan Chase. The bank, First Republic, reported it lost $100 billion in deposits over the last year as the Fed raised interest rates and bank customers moved their money into higher-performing assets. Consequently, the Fed raising rates again in an already weak bank-earnings environment prompted investors to flee to the safer bet fearing more bank collapses.
This contributed to the plague of uncertainty that continues to hover over the global economy as many central banks make an effort to stay out of a recession. The Fed’s latest hike is an effort to do just that although chairman Jerome Powell made note in his press conference that the labor market remains tight and acknowledged the higher borrowing costs “are likely to weigh on economic activity, hiring and inflation.”
The April jobs report from the Labor Department was released just two days after Powell’s speech and reflected the language he used. The report showed 253,000 jobs were added in April, well ahead of the expectation for 180,000 jobs—indicating the labor market is still extremely strong despite a clearly slowing U.S. economy. The unemployment rate was 3.4% which went against estimates of 3.6%. Wage growth also beat expectations, increasing 4.4% year-over-year against the 4.2% forecast.