There are three major forces in play this week which could affect interest rates:
Federal Reserve Meeting. The Fed’s Open Market Committee is meeting Tuesday and Wednesday of this week, and will make an announcement at 2:00 PM Wednesday with their decision on making any changes to the Fed rate. Normally the Fed does a great deal of public messaging before their meetings, so usually there is not a surprise to the markets when the decision is announced. The stock and bond markets are expecting that the Fed will reduce the Fed rate by at least 25 basis points, but the market is split on whether the Fed may announce a 50 basis point cut.
If the Fed announces a 25 basis point reduction, there will likely be little market reaction, as the market has already priced this expectation into the current prices of stocks and bonds. If the Fed announces a 50 bps reduction, this would send a mixed message to the market. On one hand, the reduction in rate will help the economy by lowering the interest paid by consumers who have HELOCs tied to the Prime rate, which closely follows changes in the Fed rate. This will increase the amount of discretionary cash that consumers have each month, and would be a boost to the economy. On the other hand, if the Fed cuts rates by 50 basis points, that also signals the markets that the Fed thinks the Economy is weaker now than they previously thought, and this could have a dampening effect on the market getting too excited about an improving US economy.
As a reminder, the Fed rate only impacts the overnight rate that Federal Reserve member banks loan funds to one another. This 1-day loan rate, often does not correlate to mortgage rates, which typically react more to changes in the rate on loans that are closer to a ten year in term, such as 10-year US Treasury bond rates. It is very possible that mortgage rates will not have any change at all in reaction to whatever the Fed announces. The Fed’s focus is keeping the economy on a growth trajectory, trying to maintain inflation at about an annual 2.00% rate, and using rate cuts and other tools to dampen an economy that is growing too fast, and help boost the economy when growth begins to lag. Two very important items that the Fed is looking at are the other two issues listed below.
US – China Trade Talks. Senior US trade representatives are meeting in Shanghai this week with senior Chinese leaders. The US representatives include Secretary of Treasury Steve Mnuchin. Both sides are down playing any expected trade breakthrough from these talks, but it is certainly always a possibility, particularly when senior leaders are personally present for the negotiations.
The US stock and bond markets are not pricing in much of any expectation of any material trade breakthrough, so if one does occur, it will be a surprise and stocks will rally, and bonds will likely drop, which could cause a sharp increase in interest rates, which could be a large increase in one day, followed by further increases in the succeeding days as the market continues to digest the significance of any trade breakthrough.
US – Iran Military Tension. If there is any increase in military tension between the US and Iran, specifically if there is any attack by Iran or its proxy forces that injures or kills US service members, this would almost certainly drive a US military retaliation. This would immediately send oil prices higher, since about 30% of the world’s oil supply transits through the narrow Straits of Hormuz in the Persian gulf, which would become very dangerous for oil tankers to navigate if there is military conflict occurring. Increased oil prices would have an immediate negative impact on world-wide economies, since this would drive up the costs to consumers to fill up their gas tanks, and also increase the shipping costs of goods produced, and many manufacturing items which utilized oil based products.
The markets are not currently expecting any imminent military conflict in the gulf, but if one does occur, this would likely cause stocks to sell off, bond prices to rally, and interest rates to drop.
Summary. This could potentially be a very volatile week for interest rates, particularly on Wednesday and Thursday. The biggest wildcard will be any breakthrough in trade talks with China. If the Fed announces only a 25 basis point rate reduction, and there is no announced trade breakthrough with China, then it is possible interest rates will not move very much. However, if the Fed announces a 50 bps reduction and there is a break through in trade talks, then there could be a significant rise in rates. It is impossible to predict future market movements on a day to day basis, however, Wednesday and Thursday have the potential to be volatile days for the market. If borrowers are currently floating the market, and they are comfortable absorbing a potentially significant increase in interest rates, in exchange for the possibility that rates could also drop a little, they may be okay continuing to float. If a borrower cannot afford to absorb a rate increase that could be 25 basis points or more in their mortgage rate, they may be better off to lock their rate ahead of a potentially volatile week.