It's a reasonable certainty that the next move for the federal funds rate will be a downward one, and at his post-FOMC meeting press conference, Fed Chair Powell pretty much ruled out any increase in rates, saying "I think it's unlikely that the next policy rate move will be a hike." He also added that "I would say that we believe [the current level of rates] is restrictive and we believe over time it will be sufficiently restrictive" to return inflation to the Fed's 2% core PCE target.
With mortgage rates holding above the 7% mark for several weeks now, it's not surprising that applications for mortgages would have tailed off. In the week ending April 26, the Mortgage Bankers Association reported that requests for mortgage credit declined by 2.3%, pulled down from a decline in applications for mortgages to purchase homes (-1.7%) and for those to refinance existing mortgages (-3.3%). The tough climate for the housing market shows no signs of changing and high mortgage rates in the heart of the spring house hunting season are certainly not helping matters any.
Although the Fed made no change to interest rate policy, they did announce a change to monetary policy in that they will slow the pace of balance sheet reduction. As we suspected, the change is in the Treasury component of their holdings, where the $60 billion per month rate of portfolio runoff will be reduced to just $25 billion per month starting in June. The ultimate endpoint for the size of the Fed's holdings is unknown, but they want to approach it at a speed that doesn't disrupt financial market functioning, as it did the last time, they meaningfully reduced their bond holdings. MBS holdings are unaffected and will still be allowed to run off at a rate of up to $35 billion per month, not that this pace has yet been achieved. Should it be eventually reached, any excess redemptions over $35 billion will be used to buy up more Treasuries, as the Fed looks to eventually hold only sovereign debt.
Fed meeting and first-of-the-month cascade of data behind us, this week should be a comparatively quieter one for the financial markets. The softer tenor of the employment report, Fed Chair Powell's "unlikely" comment and the change in bond runoff plans seemed to be enough to help the yield on the 10-year Treasury to step down to levels last seen a few weeks ago, and in turn, this should help spark a slight downturn in mortgage rates next week. It's hard to say how "sticky" the improvement in yields is, but indications are that we could see perhaps an 8 to 12 basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac. We'll know Thursday at noon.