Tag: the fed and mortgage rates

A flattening yield curve may signal higher rates in the future

Posted on by Evan in Rate Update, Swanson Home Loans Blog - Mortgage Rate Updates and More

Interest rates and US stocks got off to a good start last week but had a rough finish.  For the week mortgage rates worsened very modestly.

We are 30 days away from the next Fed meeting and according to CME group there is currently a ~97% probability that the Fed will hike short-term interest rates.  I am guessing media coverage will pick up on this topic after the Thanksgiving Holiday.

As a reminder the Fed does not directly control mortgage rates.  The Federal Funds Rate is charged on overnight loans between banks and a mortgage can last 30 years.

What’s interesting is that as the Fed has hiked short-term interest rates yields for shorter-term loans (i.e. less than three years) have increased yet longer-term durations have remained relatively low.  A look at he spread between the 2-year and 10-year treasury notes tell the story:

The yield curve is “flattening” which may mean long-term rates, including mortgages, will rise in the future or could also signal a recession.  Time will tell.

As I had written about last week (see HERE) sentiment regarding the tax overhaul is driving the direction of the financial markets. I expect much of the same this week.

The Senate version of the tax overhaul legislation, which was released on Thursday, will now be reconciled with the House version.  Given the vast differences investors now seem pessimistic that a compromise will be made.  Given that the tax overhaul is seen as inflationary this could actually help interest rates remain low……for now.

The economic calendar is busy this week.  Although we lost ground last week I will remain cautiously floating.

Current Outlook: cautiously floating

Mortgage Rate Update January 25, 2016

Posted on by Evan in Rate Update, Swanson Home Loans Blog - Mortgage Rate Updates and More

Mortgage rates are unchanged from last week and remain at multi-month lows.

It’s Fed week so I anticipate the financial markets will trade sideways until the monetary policy committee releases its statement on Wednesday at 11AM PST.  As a reminder, the Fed does not directly control mortgage rates but their comments and actions do impact the financial markets, including mortgage rates.

As we know the Fed embarked on a rate hiking cycle at the mid-December meeting.  In addition, the Fed released the chart below showing where the individual committee members forecast the Federal Funds rate to be in the future.

Source: The Federal Reserve
Source: The Federal Reserve

This chart shows that the majority of committee members had forecast 4 more +.25% hikes during 2016 (for a total +1.00%).  I use the term ‘had’ in the previous sentence because there is speculation that the Fed will back off this forecast given the recent turmoil in the financial markets.  Keep in mind, the US central bank is tightening monetary policy while its counterparts in Europe and Japan are all easing.

If the Fed does publish a less “hawkish” statement it could spark a rally in stocks which we know would not be favorable for mortgage rates.  Given that I think this is a real possibility I am going to recommend locking before Wednesday.

Current Outlook: locking before Wednesday

Mortgage Rate Update June 18, 2015

Posted on by Evan in Rate Update, Swanson Home Loans Blog - Mortgage Rate Updates and More

Mortgage rates are unchanged from Monday.

In case you missed the Fed’s statement following their monetary policy meeting yesterday they indicated that they would raise rates on a gradual basis.  This means that the market now thinks that Fed will increase interest rates on a slower pace than previously expected.  At first glance this may seem like good news….but in fact this is not favorable for mortgage rates.  Why?

It’s been a while so I will reiterate that inflation is the primary enemy of mortgage rates.  When a lender makes a loan and will be repaid in the future they have to take into account the projected purchasing power of that future repayment in setting a rate of interest to charge a borrower.

Rate hikes may be coming slower than we all thought....and that is not good for mortgage rates.
Rate hikes may be coming slower than we all thought….and that is not good for mortgage rates.

Since the great recession inflation has consistently been below the Fed’s target of 2% which is part of the reason why mortgage rates have remained near historically low levels.  In fact, the Consumer Price Index was reported today and it showed prices continuing to rise by less than 2% on a year-over-year basis.

However, the interest rate markets are forecasting that inflation will be picking up in the near future.  This is evident in mortgage rates increasing by .25%-.50% over the past month.

When the Fed increases short-term interest rates is helps to curb inflationary pressure.  Therefore, by the Fed taking a slower approach to raising rates than previously thought it is more likely that they could get behind the curve in fighting inflation.  This is why yesterday’s announcement was actually unhelpful to rates moving forward.

I am going to shift to a locking bias given this new information.

Current Outlook: locking

Bernanke indicates further easing is likely

Posted on by Evan in The Fed

You may recall that I blogged THIS POST at the end of September in which I indicated that lower mortgage rates would be dependent on HOW MUCH the Fed would engage in quantitative easing.  The WSJ reported today (see HERE) that Fed Chairman Ben Bernanke stated in a speech today that he believes “additional purchases have the ability to ease financial conditions”.  It sounds like it is pretty much a forgone conclusion that the Fed will be buying up more Treasury debt later this year with the idea of driving down long-term interest rates.  However, the markets have already priced Fed action into current rates.  The question is no longer “If?” the question is “How much? How far? and How quickly?” will the Fed take action.  A report today suggested that based on the current level of interest rates the markets are pricing in Fed action of between $315 billion- $670 billion.

If this report is right then we can assume that Fed action at the high end or above this range will cause mortgage rates to dip even more & a number at the lower end or below this range will likely cause rates to reverse higher.