Mixed Messages from Fed

Aug 19 2016

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The economic data had little impact on mortgage rates over the past week. Mixed messages from the Fed caused some movement. For the week, mortgage rates ended just slightly higher.

Mortgage rates responded to comments from several Fed officials, creating some volatility during the week. By the end of the week, though, investors were left with the impression that Fed officials have a wide range of opinions about the appropriate timing to tighten monetary policy. As a result, there was little net change in either the outlook for future Fed policy or in mortgage rates. 

The mixed messages began on Tuesday with a speech from the Fed's Dudley that was unexpectedly hawkish. He suggested that Fed rate hikes may come sooner than investors expect. Wednesday's release of the minutes from the July 24 Fed meeting revealed conflicting views on the outlook for inflation and the degree of support for tighter monetary policy. Thursday's comments from the Fed's Bullard were very dovish. He said that one federal funds rate hike is all that will be needed for the "foreseeable future." 

The most recent reading for a widely followed inflation indicator, the core consumer price index (CPI), revealed that core inflation was 2.2% higher than a year ago. Core inflation excludes the volatile food and energy components. Many investors prefer to look at core inflation because it provides a clearer indication of the underlying trend. In 2016, core CPI has held close to the current level all year.

Looking ahead, the report on new home sales will come out on Tuesday and the report on existing home sales on Wednesday. Durable orders, an important indicator of economic activity, will be released on Thursday. The second estimate of second quarter GDP, the broadest measure of economic activity, will come out on Friday. In addition, Fed Chair Yellen will be speaking at Jackson Hole on Friday. Investors will be looking for additional guidance about future Fed policy.

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Topics: mortgage news, economic data, monetary policy, mortgage rates, new home sales

Fed Changes Guidance

Mar 21 2016

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Wednesday's Fed meeting resulted in positive news for mortgage rates. Mixed economic data released over the past week was roughly neutral. Mortgage rates ended the week lower. 

As expected, the Fed did not change the federal funds rate. However, the statement contained guidance which reduced the expected number of rate hikes in 2016 from four to two. Reasons for this included a downgraded outlook for U.S. economic growth and inflation, as well as concerns about the pace of global economic growth. The statement was good news for mortgage rates, as this guidance pushes tighter monetary policy further into the future, including the expected timeline for the Fed to begin to reduce its large holdings of mortgage-backed securities (MBS) and Treasuries. The added demand for MBS from the Fed helps to keep mortgage rates low. 

Fed officials have stated that they would like to see inflation rise to their target level of 2.0%. After holding steady for most of 2015, core inflation has increased pretty quickly over the last few months. In February, the core consumer price index (CPI), a widely followed inflation measure, unexpectedly rose to an annual rate of 2.3%, the highest level since May 2012. Core inflation excludes the volatile food and energy components. 

However, Fed officials prefer a different monthly indicator, the core PCE price index. This index measures a broader scope of prices and rebalances the category weightings more frequently than CPI. The most recent reading for core PCE showed a 1.7% annual rate in January. The results for February will be released on March 28. Core PCE has generally run about half a point lower than core CPI.

Looking ahead, Existing Home Sales will be released on Monday, and New Home Sales will come out on Wednesday. Durable Orders, an important indicator of economic activity, will be released on Thursday. The third estimate of fourth quarter Gross Domestic Product (GDP) will come out on Friday. 

Topics: The Money Source, economic data, federal fund rate, home sales, GDP, CPI, mortgage rates, new home sales

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