When asked what they thought of the Fed Funds rate going forward, the Fed still sees ongoing increases as deemed appropriate. The Fed switched some of its wording in its statement saying that now it’s not the pace of hikes that they are keeping an eye on; they are now deciding on the extent and amount of rate hikes. What these statements more than likely mean is that if the Fed continues to hike the fed funds rate, the hikes themselves will probably remain at a 25 basis point level. Fed futures is estimating only one more hike in March, but Fed Chair Powell hinted that there may be more than just one.
What the Fed is really focused on is its terminal rate. The terminal rate is the maximum level to which the Fed would hike the funds rate. During the press conference, Fed Chair Jerome Powell stated that he believes we need a couple more rate hikes at 25 basis points which would mean one rate hike in the March 22nd meeting and another at the May 3rd meeting. This is in line with the Fed’s December projections as they were targeting a terminal rate of 5% to 5.25%.
Lastly, Jerome Powell acknowledged that inflation is coming down. This was a big reason why the bond market responded well to the rate hike. Inflation is the arch-enemy of mortgage bonds. Simply put, when inflation goes up, mortgage bond pricing decreases and mortgage rates increase. When inflation goes down, however, the bond market typically responds well to this and you usually see mortgage bond pricing increase and mortgage rates decrease.
When looking at different inflation reports and the verbiage used by the Fed at their latest meeting, it seems that the Fed is getting inflation under control. This should bode well for mortgage bonds and mortgage rates in the future.
Source : http://bit.ly/3JD0sBU