MBS Day Ahead: Last FOMC Meeting Before Rate Hike Becomes Real Risk

Although Pending Home Sales will be out this morning at 10am, and although that's fairly interesting data in its own right, today's broader market focus will most assuredly be on the FOMC. 

Today's Fed announcement is trickier than most.

We're NOT at all likely to see any shift in policy.  Yet the very next meeting is one of the leading candidates for a rate hike.  Add to that the fact that such a rate hike would be the first change in the longest-running stretch of exceptionally low rates in market history, and things quickly get more complicated.  We're essentially left to refine important conclusions from verbiage that may be very little-changed.

Admittedly, the Minutes from today's meeting (to be released on August 19th) will be far more scrutinized as a prologue to the high-stakes meeting in September, but any clear 'leaning' in today's text will still matter.  That means if the verbiage stays its current course or becomes any more positive on the state of the economy and inflation, the first hike will be increasingly seen in September.

What does that mean though?  As we've discussed, the rate the Fed sets doesn't dictate mortgage rates directly.  That's very true--especially over short time frames.  In fact, it's not uncommon to see small pockets of divergent movement between Fed Funds and longer term rates. 

But in the longer run, it's tremendously important.  Historically speaking, when the Fed has lifted off from a major cyclical low ('86, '94, '04), longer term rates were either already moving higher or quickly began to do so.  In either case, rates didn't fall back to the pre-hike levels for years.