Our Federal Reserve is in the Headlines
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Last week’s meeting of the U.S. Federal Reserve’s Open Market Committee garnered the headlines (the FOMC Statement essentially said “steady as she goes. Nothing to see here.”). Though there were four dissents to the decision, one to cut rates by a quarter of a percentage point, and three to remove the “easing bias” in the statement, economists and others, including Orion’s brokers, watch Fed speeches very closely as well, and that is something to watch.

What should brokers be aware of? In remarks in New York City on Tuesday, New York Federal Reserve President Williams discussed the regional and U.S. economies, as well as how the Federal Open Market Committee (FOMC) is navigating through uncertainty to balance the risks to achieving its dual mandate goals of maximum employment and price stability. He emphasized that the Federal Open Market Committee must steer policy through an unusually uncertain environment shaped by geopolitical tensions, especially in the Middle East, and mixed economic signals.

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The Push and Pull of Inflation and Interest Rates
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A growing economy typically has higher rates, a slow economy low rates (to spur borrowing and spending). While the U.S. economy has remained broadly resilient (with solid consumer spending, steady business investment, and strong regional housing demand in areas like New York) data presents a more complicated picture beneath the surface. The labor market appears stable by traditional measures such as unemployment and payroll growth, yet softer indicators suggest declining confidence and slower hiring, particularly for job seekers.
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While this is happening, our brokers know that inflation is being pulled in different directions: tariffs and rising energy prices are pushing it higher, while underlying trends and anchored expectations suggest longer-term pressures remain contained. As a quick aside, Fed Chairman Powell revealed yesterday that he will remain on the Board of Governors for some time after his term as Chairman ends on May 15.

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Your clients should know that the target federal funds rate is entirely out of the control of lenders and moves up or down based on the Federal Reserve’s directives. During the pandemic it hovered around zero. Economists look at the effect of a target fed funds rate increase on loans of varying maturities, using a panel of loan rates advertised by bank branches. The interest rate response to a change in the target rate decreases as the duration of the loan increases. For loans of short duration, like adjustable-rate mortgages, a change in the target rate has a substantial effect because the target rate has historically anchored the short-term funding costs of financial institutions and yields on other short-term securities, such as Treasury bills.

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For loans of longer duration, like 30-year fixed rate home loans, the interest rate in corporates expectations of the future path of the target federal funds rate; thus, changes to the current target rate have a smaller effect. These effects are also included in the yields earned by U.S. Treasury securities. Comparable to mortgage loans, yields on long-maturity bonds are less sensitive to changes in the target rate than yields on short-maturity bonds. The yields on securities with a shorter maturity respond the week of the target rate increase and continue to adjust upward for as many as six weeks following the increase. Unlike loan duration, the quality or riskiness of a loan does not appear to affect its sensitivity to fed funds increases.

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