MBS Day Ahead: Back to Things That Matter

Yesterday's FOMC Announcement was largely a diversion, but only because there happen to be more important things going on in the bigger picture.  The FOMC was still important in that it confirmed the Fed is paying attention to reality and not unwilling to constantly evolve its outlook based on that reality.

Some would say the Fed perennially overestimates economic potential and then revises outlooks.  Those folks are right.  The Fed obviously does this, but these critics also tend to assert the Fed is doing this purposefully.

No...  They just don't know any better.  A lot of older, more well-to-do folks and a lot of people who rely more on academic models to understand the economy are in the same boat.  They're not in touch with the true nature of the broader malaise that's been with us since the crisis.  

Incidentally, if you think that I'm jumping to too much of a conclusion here, keep in mind that mortgage people have always been in a particularly excellent position to understand this malaise.  It may feel like an obvious thing to us, but much of the rest of the world is just now starting to figure it out.

For the first time ever, I felt like Yellen really admitted that yesterday in talking about how the pressures keeping interest rates near zero would not be going away any time soon.  She seemed somber, solemn, and at times, defeated.

But markets move on today, and the Fed's strategy will depend on how bigger-picture events unfold.  We're talking almost exclusively about things that are NOT happening today.  These include Brexit and the employment data between now and the next Fed meeting.  Inflation is always somewhat important, but one CPI report (which we get right now) won't make a difference when inflation expectations are at 5 year lows and "inflation compensation" (TIPS trading levels) have been trending lower.

Bottom line: bigger decisions cannot be made until the end of next week after the Brexit vote.