Rate-hike odds rise, a warning sign for lenders

The share of economists expecting the next Federal Open Market Committee action to be a rate hike continues to grow, the latest Wolters Kluwer survey found.

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The latest Blue Chip Economic Indicators survey was taken on July 6 and 7, which was before the June meeting minutes were released. But it was a couple of weeks after Kevin Warsh, the new chairman, noted that half of the governors participating in the dot plot expected an increase in short-term rates.

“The Blue Chip panel took note of the Fed shift, but on balance, the consensus view on monetary policy changed only marginally,” the Wolters Kluwer report commented. “A solid majority (66%) expects the next change from the Fed to be a rate cut, although most do not see the cut coming until next year.”

How many economists expect a short-time rate hike

Over one-third of the panel in the July BCEI survey, 34%, think a short-term rate increase is on the table. This compared with approximately one-quarter of the panelists in the June report and 9% for the prior two months.

On a month-to-month basis, some panelists have pushed up their timing for the next increase. Expectations for movement at the July meeting remain at 2%, but the share which expects a change during the September gathering grew to 15% in the latest survey, from 4% one month ago. In May, however, 22% said the FOMC would act at the September meeting.

No economist expects a change at the October meeting, while 83% said “later.” The later response in the June survey was 93%.

The majority of panelists which expect a rate cut do not think the FOMC will act until the middle of 2027, the Wolters Kluwer report says. They predict a single 25 basis point reduction next year.

Changes in views for the Fed Funds Rate

The consensus for the Fed Funds Rate for this year and next are now higher versus the June survey. By the end of this year, the BCEI panelists put the FFR at 3.67%, up from 3.56%. For 2027, the consensus expects 3.41%, compared with 3.32% a month ago.

The effective FFR as of July 9 is 3.62% according to Federal Reserve Bank of New York data.

While the FFR is not used in setting long-term mortgage rates, investors generally price expectations about the economy and how the FOMC acts into the 10-year Treasury yield, which is one of the things used, along with secondary market pricing.

“Consensus expectations for the 10-year benchmark yield have risen since February (along with market rates),” the report said. “Going forward, little further change in longer-term yields is expected over the forecast period.”

On July 10, the 10-year Treasury closed at 4.57%, according to Yahoo Finance. The last time the 10-year closed under 4% was on Feb. 27. The prior day, the Freddie Mac Primary Mortgage Market Survey had the 30-year fixed under 6%. The following weekend, the conflict with Iran began. Between the conflict and concerns over inflation, the 10-year Treasury, along with mortgage rates, have increased.

This week’s Freddie Mac PMMS put the 30-year fixed at 6.49%.