This week the Federal Reserve, led by Fed Chair Jerome Powell, will meet for their two-day
meeting starting on Tuesday. All eyes will be on them to see if they will be raising their Fed
Funds Rate, which is the rate banks charge when they lend to each other. Currently, the Fed
Funds Rate is in a range of 0.0-0.25.

It appears as though the markets are pricing in an estimated 25 basis point rate hike, but their
forward guidance will be important. Is the Fed going to continue to raise the Fed Funds rate at
the next upcoming meetings? There are eight in total. When the Fed hikes rates they are
attempting to “cool” or “curb” inflation. This happens as a result of making money more
expensive and it tightens up the money supply. Also, by being a deflationary utility, investors
tend to focus more on bonds since their pricing increases creating a more valuable return on
their investment.

As Bond Pricing increases, mortgage interest rates decrease. It is an inverse relationship. So
basically, the more the fed hikes, the better the chance for seeing more attractive interest
rates.

We will also be watching the yield curve or the 10 -year and 2-year charts looking for an
inversion. Currently, they are around 25 basis points or so apart, but when the Fed hikes it will
cause shorter-term yields, like the 2-year to move higher. If the Fed’s actions are perceived to
curb inflation to a degree you can see long-term yields, like the 10-year, move lower. This
would certainly cause the yield curve to flatten further and possibly invert. An inverted yield
curve is a very reliable indicator of a recession.

When looking at historical recessionary periods, mortgage interest rates actually fall and the
housing market holds its own and can actually benefit. Yes, during the 08 -09 recession we saw
home values fall, but you have to remember that the recession of that period was actually
caused by the collapse of the housing market and not the other way around. History suggests
that real estate is often a safe investment during a recession.

We all must keep in tune with the Fed and their current plans as this is already impacting the
mortgage market and most certainly will continue to in the very near future. It is important that
you work with a trusted advisor who understands this and helps you work the Fed’s goals into
your business plan.

Contact your Advisors Mortgage Loan Officer today to discuss the current market in more detail and to
learn what you qualify for. “We’re Happy to Help” Call us at 855-LOANS-USA.

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