This article was originally published on ETFTrends.com.
On Wednesday, the Federal Reserve decided to keep interest rates unchanged and will end its balance sheet reduction in September, sending mortgage rates lower on Thursday.
According to Mortgage News Daily, the decision saw the 30-year fixed mortgage product fall to 4.34 percent, which is the lowest in over a year and 19 basis points lower versus the same time a year ago. Following the Fed's aggressive rate-hiking policy in 2018, the 30-year fixed rate went over 5 percent at the start of November, causing home sales to fall sharply during the months of December and January.
"This is about as big of a change as anyone expected. It means the Fed will be buying more bonds more quickly," wrote Matthew Graham, chief operating officer of Mortgage News Daily. "And bond buying results in lower rates, all other things being equal."
During a testimony to Congress last month, Federal Reserve Chairman Jerome Powell said that the central bank is close to its timetable of ending its balance sheet reduction. Powell is referring to the central bank’s holdings of about $3.8 trillion in bonds, which it has steadily been reducing since October 2017.
A separate statement by the Fed month alluded to a more flexible central bank that would be more strategic with regard to its balance sheet policy. The Fed is reducing its balance sheet by a maximum of $50 billion in proceeds from the sale of bonds, which it will use for reinvestment.
Economic Concerns of Would-Be Homeowners
Lowers mortgage rates, however, could be offset by prospective homeowners who are holding off on purchasing if the economic outlook appears murky.
"While a plus for homebuyers, if concerns about the economic outlook rattle consumer and homebuyer confidence, it could offset the benefit of lower mortgage rates," noted Danielle Hale, chief economist at realtor.com.
In move that was widely anticipated by most market experts, the Federal Reserve on Wednesday elected to keep rates unchanged, holding its policy rate in a range between 2.25 percent and 2.5 percent.
The capital markets initially expected rates to remain steady after the central bank spoke in more dovish tones following the fourth and final rate hike for 2018 last December. Prior to the announcement, the CME Group’s FedWatch Tool was expecting a 98.7 percent chance that rates would remain steady.
“Patience” has been a mainstay in Fedspeak since the December rate hike and again in January when the central bank elected to keep the federal funds rate unchanged, saying that it will be patient moving forward with respect to further rate adjustments. Moreover, the Fed has also been saying that it will be mostly data-dependent and have more flexibility when it comes to interest rate policy decision-making.
“Since last year, we’ve noted some developments at home and around the world that bear our close attention,” said Powell. “Given the overall favorable conditions in our economy, my colleagues and I will be patient in assessing what, if any, changes in the stance of policy may be needed.”
ETF Plays to Consider?
Is a housing market rebound on the way, which could pave the way for other cyclical sectors?
For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
Conversely, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
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