Current mortgage rates have started to climb, leaving borrowers worried and wondering. This past week, interest rates inched higher, while shorter-term rates began to decline. The Federal Open Market Committee’s April policy statement maintained the target Fed Funds rate, which has been between 0%-0.25% for years. Yet, the FOMC’s valuation of current economic conditions resulted in a slight downgrade, consistent with the GDP report that the economy grew by only 0.2% in the first quarter.
Despite these slight changes, the committee is certain that economic conditions will improve throughout the year. An anticipated hike in rates is expected in September, and shorter-term interest rates will mirror this prediction this summer.
So what happened when we learned more about what the Fed was thinking last week? The yield curve steepened due to low short-term rates and high long-term rates. The GDP’s report and the FOMC’s valuation of current economic conditions may have contributed to the rise in longer-term interest rates, leading to higher Treasury yields. In Europe, economic statistics have been more optimistic and deflation fears have waned. The shift in capital flows out of the United States will likely reverse, resulting in lower longer-term yields over the coming weeks.
Many analysts believe that economic growth will pick up over the next few quarters with GDP returning to a 3 percent range by the third quarter. This will allow for capital flows to return into the United States and shorter-term rates will increase by September. Investors should not view the change in rates as a permanent shift in market dynamics since conditions are anticipated to improve in the near future.