Expect mortgage-rate volatility around employment, inflation reports

3-Federal-ReserveIn recent days, it would appear that the markets have adjusted to the notion that the Federal Reserve will be beginning the process of tapering its purchases of bonds and mortgage-backed securities. Fear of this impending change (and a modestly growing economy) is what pushed mortgage rates to these higher levels over the past few weeks.

Still, even if the end is coming, we still do not know the potential velocity of the move–that is, how fast the Fed will taper QE3.

Tapering QE3 will be dictated by two things

The Fed has made it as clear as they can that the tapering of QE3 is likely to be dictated by two things:

  1. Employment
  2. Inflation

This being the case, it is reasonable to expect volatility around the release of these reports, much as we saw from the latest employment report.

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Pay special attention to employment

The speed of Fed’s tapering is expected to be predicated on downward movement of the unemployment rate or inflation moving above target levels. In this regard, unemployment carries the greatest weight, as it is closer to stated policy milestones than inflation, at least at the moment.

It bears noting that we’ve seen these kinds of markets before, where a single strong piece of key data–such as the employment report–released into a jittery market can bounce mortgage rates higher.  However, a volume of softer and ancillary data can nudge mortgage rates lower, and should these dips come, consumers would do well to take advantage by locking in their rates.

Fear of misinterpretation

The minutes of the most recent Fed meeting were released last week, and in them there was a lot of discussion about how best to present a message to the markets about the Fed’s intentions for QE3. Concerns were expressed by members that any message about tapering might be misinterpreted by the market as an end to policy accommodation in general, bringing unwanted or unwarranted reaction.

Post-meeting press conferences

The members concluded that Mr. Bernanke should describe a likely path for tapering in his post-meeting press conferences, and take pains to decouple changes to QE3 from the Fed’s other policy tools, such as the federal funds rate. Mr. Bernanke did so, and also tried to make it plain that changes to QE3 would be likely to occur before long, but only if the Fed’s forecasts were correct. As we know, the markets focused on the fact that the end of QE3 was coming, and the result was a panic run by the bond market to the exits.

We have yet to see the full effects this exodus will have on housing markets and the broader economy. We’ll have to wait and see.

HSH Associates Financial News Blog

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