Market Forecast: Mortgage Applications, Retail Sales, and FOMC Meeting

Blog posted On June 11, 2018

The Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday of this week for their fourth semiannual monetary policy meeting of the year.  So far this year, the Federal Reserve has raised the benchmark interest rate once.  Earlier projections had slated three interest rate hikes this year.  Mortgage application submissions jumped last week, as interest rates started to subside.  Other market moving reports scheduled for release include retail sales, coming out on Thursday. 

The Federal Reserve is largely expected to raise interest rates following this week’s FOMC meeting.  As inflation nears the 2% target and the job market approaches full employment, rate hikes are expected to continue.  Recent jobs reports have been strong, and despite a lack of wage growth, the economy is continuing to add jobs.  So far this year, the Fed has raised interest rates once, following the March meeting.  In January, the Fed projected three rate hikes for 2018.  If the Fed votes to raise interest rates, it will be the seventh rate hike since December 2015. 

Mortgage applications turned around last week, as mortgage rates started to fall following an initial climb earlier in May.  For the week ending 6/1, new purchase applications increased 4.0% and refinance applications increased 4.0% for a composite increase of 4.1%.  If the Federal Reserve raises interest rates this week, mortgage rates are likely to react.  Even with a Federal interest rate hike, the influence on mortgage rates will be gradual, and average mortgage rates are still historically low. 

Retail sales measure the total receipts of goods and services sold at retail stores to final consumers.  Retail sales are a big driver of economic growth, as consumer spending makes up approximately two-thirds of Gross Domestic Product (GDP).  In April, retail sales increased 0.3% month-over-month and the increase was the same excluding autos and excluding autos and gas.  Retail sales slowed in the first quarter of 2018, as expected following the busy holiday season.  As expected, tax cuts also spurred consumer spending.

The Federal Reserve raises interest rates when the economy strengthens to curb inflationary pressure.  Overall, interest rate hikes are good, and a sign of economic growth and recovery.  As interest rates continue to rise, home price appreciation will likely slow down.  Most households have a limited budget to spend on housing costs and continued home price appreciation and interest rate hikes are not sustainable for affordability.  

Sources: Bankrate.com, Bloomberg, CNBC, MarketWatch, Mortgage News Daily