The Fed pause rattles mortgage rates after Powell drops inflation bomb 💣📈😭

Flash Market Update

The Federal Reserve concluded their two-day FOMC meeting with a decision to keep their overnight lending rate unchanged.

Their benchmark Fed Funds rate remains at 3.50 – 3.75%.

This was expected as inflation data hasn’t warranted any shift in Fed policy, meanwhile the long-term impact of tariffs and oil price shocks are still unknown.

During the post-FOMC press conference, Fed Chair Jerome Powell was asked:

“How high would oil prices have to go for the committee to vote to raise rates?”

However, Powell avoided a direct answer stating:

“We’re prepared to do what needs to be done, but I wouldn’t want to hypothesize about what that might be.”

Despite the uncertain outlook, The Fed expects the unemployment rate to stay at its current level of 4.4% as tighter immigration policies keep a lid on labor force participation.

The U.S. Central Bank also implied inflation will drop considerably by the end of the year; a projection that was not corroborated by the PPI data today (0.7% vs 0.3% expectations).

Based on the dot plot the committee is also projecting at least one more rate cut in 2026.

Financial markets were leaning more towards two cuts, but after today that has probably adjusted to be more in-line with the Fed.

Not discussed today but certainly important to mortgage rates, is the Fed’s shift in balance sheet concentration from longer duration notes/bonds to shorter T-Bills.

The Fed is already no longer reinvesting in MBS; this shift in how they reinvestment in Treasuries could add additional pressure to mortgage bond liquidity.

Although the spread between mortgage bonds and the 10-Year has widened by 10-bps since the operation in Iran began, it is still 30 bps lower than the same time last year.

Tomorrow’s 10-Year Note auction will be our first glimpse of how shook bond markets are feeling after today’s FOMC press conference.

Meanwhile, Powell is speaking at a conference on Saturday, which will give him a chance to rephrase some of today’s wording that roiled markets.

Thanks for reading.

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