The long-awaited meeting of the Federal Reserve’s Open Market Committee is upon us. By Wednesday afternoon we will know how large the Fed’s first move will be. As we have mentioned previously, it appeared that a .50% increase in the Federal Funds and Discount Rates were a chinch just a few weeks ago. However, intervening factors included the release of a jobs report less than two weeks ago and the Russian invasion of Ukraine.
It is an understatement to say that the strong sanctions levied on Russia are expected to have a significant negative impact upon their economy. However, it is likely that the world economy will be affected negatively to a smaller extent. The Fed’s assessment of this negative risk will be weighed against the increased risk of inflation coming from the energy sector. Could this lead to a smaller .25% increase in rates? That is entirely possible. As we have also pointed out, any Fed’s increase in rates will not necessarily translate into higher interest rates for mortgages.
There are two reasons for this. First, mortgage rates have been rising all year in anticipation of the Fed’s move. Secondly, the Fed’s rates are short-term rates and mortgages are longer-term rates. The Fed controls directly overnight borrowing rates, which is very short-term. If the Fed surprised the market with a .50% increase and very strong language, certainly all bets could be off. But many expect the Fed to take a softer approach, especially considering the instability of the world right now. By tomorrow, we will know.