Rate Update March 3, 2008

We expect mortgage rates to drift higher this morning in response “Fed-speak”.

If you’ll remember back to the middle of February it was Richard Fisher (Fed official) who criticized the recent cycle of Fed cuts as being soft on inflation. His comments in a speech he made in Mexico City caused mortgage backed bonds to go on a huge sell-off which pushed mortgage rates higher by 1.00%.

This morning we got similar comments from Philadelphia Fed President Charlie Plosser. In his speech he suggested that the Fed was losing its credibility as an inflation fighter and that monetary policy “should be reversed quickly once the threat from financial markets abates”.

He went on to comment, “One cannot and should not ignore other fundamental aspects of policy, especially the tendency for inflation to accelerate when policy is unduly easy…” and “Deviations (in monetary policy) should be temporary and limited and promptly reversed when conditions return to normal…to do otherwise risks eroding central bank credibility and unleashing inflation expectations.”

We’ve said for sometime that the ultimate impact of the Fed’s rate cuts would be inflationary pressure. For now these comments have put inflation back in the spotlight and therefore we are in a locking position.

Current Outlook: locking

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