Portland Mortgage Market Update — March 21, 2025

It was Fed week this week! The Fed met earlier this week and while they didn't change rates they did make some moves that had some impacts to mortgage rates. While most of the media focused on their shift in tone on their outlook for the future of the economy, they quietly announced they are going to change their runoff allowance from $25B to $5B/month. When the pandemic hit the Fed expanded their balance sheet exploded from around $4 Trillion until it peaked in 2022 to just shy of $9T in an effort to keep the economy moving (which is why we had such low rates at that time). They have since been trying to reduce that balance sheet by selling off their securities, and as these bonds and other mortgage backed securities hit the open market their value was diluted. To make them more attractive, bond yields had to go up and since mortgage rates tend to follow the 10 yr treasury yield, rates went up and remained elevated. By reducing the runoff of these assets, there will be fewer of them for sale and the open market. Less supply increases demand and the yields can go down to make them more attractive.

This was good news for rates. While it didn't spur a "rally" per se, it did reverse a worsening trend that started at the beginning of the month. The Fed also indicated that they are still tracking for 2 cuts this year, and they updated their Summary of Economic Projections. In it they adjusted their forecasts for unemployment, GDP and Inflation. They now think unemployment will hit 4.4% this year (previously anticipated to hit 4.3%), the GDP will slow to 1.7% (previously thought to reach 2.1%) and inflation to hit 2.8% (previously 2.5%).

Isn't there a term for that? Yes, a period of high inflation, high unemployment, and low economic growth is known as "Stagflation". It is kind of the worst-case scenario because there isn't a real clear-cut way for the Fed to navigate the economy out of it. Usually, inflation and unemployment work in opposition, and are influenced by the Fed interest rate. The Fed increases interest rates to combat inflation, which causes unemployment to increase. If unemployment gets too high, they cut interest rates at the risk of speeding up inflation. With stagflation, there really isn't a move for the Fed to make.