Elections Impact On Mortgage Rates

Election Impact on Mortgage Rates.  This is the question everyone is asking,

and nobody yet has the answer to. The answer will depend on the future level of

inflation rates and the level of future Federal budget deficits. 

If bond investors believe long term inflation rates will be higher, this will create a

1:1 increase in longer term bond yields so that investors can earn their targeted levels

of return, above the rate of inflation. Increased government spending does create an

upward pressure on inflation rates, as the government is hiring people and buying

goods when they spend money.

If the Federal budget deficit continues to grow, this will require the Treasury to

issue more bonds to finance the growing deficit. The increased supply of bonds will

push down bond prices through the normal market principles of supply and

demand. Lower bond prices mathematically push up bond’s yield, which is why

mortgage interest rates will go higher if MBS prices go down.

As the Trump administration names the new leaders for Treasury, HUD, Ginnie

Mae, FHFA and the CFPB, who then begin to lay out their policy objectives, the markets

will attempt to estimate the expected impact to inflation rates and the budget deficit. If

the Trump administration can cut government spending and at the same time maintain

or increase tax revenues, then the budget deficit will shrink, and this would create a

downward pressure on mortgage rates. 

Federal Reserve.  The Federal Reserve’s Federal Open Markets Committee

(FOMC) is meeting today for the second day of their normal two-day regularly

scheduled meeting. The markets expect the Fed will announce a 25 basis point cut to

the Fed Funds rate, bringing the level down to 4.50%. The Fed Funds rate had rapidly

increased from zero to 5.25% as of July 2023 and starting in this past September the

Fed has said they would like to bring them down to a more “neutral” level that the

markets believe will be in the 3’s. The markets are currently estimating the Fed wants

to bring the rates down to about 3.7%, and just 30 days ago, the markets were

thinking the Fed would drop them to about 3.2%. How fast and how far the Fed drops

the Fed Funds rate will depend on future inflation rates and the health of the labor

market. The Fed is trying to prevent sharp contractions in the labor market that result

in many people losing their jobs.

The Fed Funds rate is the rate for 1-day loans between banks who are members

of the Fed system. The Fed Funds market provides a source of short-term funding for

banks, to supplement their other funding sources such as checking and savings

accounts. By controlling this rate for 1-day loans, the Fed can impact the cost of funds

for banks, and this can spur or curtail banks lending activity for loans they would

normally hold in their portfolios.

Today’s likely announcement of a 25 basis point rate cut should have no impact

on MBS prices, as this information has already been built into this morning’s price levels

for MBS bonds. This cut will have an immediate benefit for borrowers with HELOCs

based upon the prime rate.