The Fed Spoke – Why Didn’t Rates Raise Immediately?

January 11, 2022
The-Fed-Spoke-Why-Didn’t-Rates-Raise-Immediately
Long term rates have risen even though the Fed has not raised rates in years.

 

We think it is best to remind our readers when the Federal Reserve hits the headlines. Close to a month ago, the Fed met and came out with some pretty strong statements. First, they sped up the tapering of their purchases of bonds and mortgages after supporting the markets throughout the pandemic.  Second, they “projected” multiple rate hikes in 2022.  As a result, many braced for further rate increases.

Only this did not happen. There are plenty of reasons for this lack of reaction by the markets.  Regarding tapering of their purchases, it is assumed the Fed had determined that the markets could stand on their own two feet without the Fed support.  In fact, one reason there is inflation today is that there is too much cash chasing too few goods. Thus, there is plenty of appetite for investments such as bonds and mortgages. Increasing home prices make mortgages an even safer investment.

With regard to hiking interest rates, we must remember that the Fed controls short-term rates directly. We are talking “overnight,” which is very short-term. The rates consumers deal with, such as mortgages, are very long-term. Mortgage rates move with the markets.  And while the Fed has not raised rates in years, long-term rates have already risen by one-half of one percent within the past year. Thus, the Fed move is trailing the markets.  As a matter of fact, the Fed’s strong language to control inflation may serve to calm the markets. We are not saying that rates will not rise this year, and if the first few trading days of the year is any indication, it looks as though the trend will continue to be higher. Especially as the markets reacted to a reminder of the Fed statement through the release of the minutes of their meeting last week.