Fed Eases

With little major economic news, investors were focused on the Fed meeting this week. The message from the Fed was essentially in line with expectations, however, causing little reaction. Mortgage rates ended the week slightly higher.

Heading into the Fed meeting on Wednesday, investors had anticipated another rate cut with a message indicating that this might be the last one for a while. As a result, the 25 basis point cut in the federal funds rate to a range of 3.50 to 3.75% surprised no one. Even with dissents from three officials, the most since September 2019, there was little reaction, as it had been well established that there was an unusually high degree of disagreement on the committee. The basic question remains whether to place more weight on stubbornly high inflation or on a weakening labor market. The dot plot projections from officials indicated that there will be just one more 25 basis point rate cut next year and one additional reduction in 2027, similar to their last set of forecasts three months ago. During the press conference following the meeting, Chair Powell said that the Fed is now "well positioned to wait to see how the economy evolves." Perhaps the biggest surprise was that the Fed will resume purchasing Treasuries this month, sooner than expected. 

By contrast, the number of layoffs rose to the highest level since early 2023. In addition, the quits rate, which measures the percentage of people voluntarily leaving their jobs, fell to the lowest level since May 2020. Generally, workers are less likely to quit when they are less confident in their ability to find a better opportunity.

It was a good week for mortgage applications overall, especially for refinancings, according to the Mortgage Bankers Association (MBA). Applications to refinance rose 14% from last week and were a massive 88% higher than one year ago. Purchase applications fell slightly from the prior week but still were up 19% from last year at this time. Of note, buyers seeking lower rates increasingly turned to the FHA. There was a 24% gain in FHA refinances and a 5% rise in FHA purchase applications this week.

Looking ahead, investors will continue to monitor comments from Fed officials for hints about monetary policy next year. With the end of the shutdown, the schedule for the release of delayed government economic reports continues to be gradually updated. Tuesday will be the big day next week with the key Employment report, Retail Sales, Housing Starts, and Import Prices scheduled to be released. The Employment report reveals figures on the number of jobs, the unemployment rate, and wage inflation which are always closely watched. The Consumer Price Index (CPI), a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services, will come out on Thursday. Existing Home Sales will be released on Friday.