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The fear in the banking sector was responsible for a substantial drop in mortgage rates over the past 2 weeks. As those fears subside (to some extent, anyway), the market reaction has reversed somewhat. This is most commonly seen in the US stock market.
Stocks do not determine interest rates. The job falls to bonds and bonds have been slow to retrace their recent moves. This means rates are higher, but have not yet returned to the levels they were before the banking drama began. This is a good thing, but it also presents a vulnerability. In particular, if banking fears continue to subside, rates are more likely to rise.
Another important input for rate action will be tomorrow’s Fed announcement. The Fed is highly likely to hike rates by 0.25%. There is a slim chance (very slim) that he may stay away from the hike in this meeting. Either way, they will also update their rate outlook for the coming months/years and that is arguably more important than what they do with tomorrow’s rate hike.
Last but not the least, Fed Chair Powell will hold the usual post-announcement press conference and this will give her a chance to weigh in on whatever decision she makes on a rate hike. In other words, if they don’t hike, Powell rates can talk more cautiously about the environment. If they do hike, he can assure that they are not trying to push any more banking issues.
As a result, there could be a sudden rise or fall in rates starting tomorrow at 2 PM Eastern Time.
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