Fed causes mortgage rates to rise

Below is an excerpt from of our latest Market Trends newsletter, Keith Gumbinger’s latest examination of the economic conditions that influenced mortgage rates. Sign up to receive the Market Trends in your inbox Friday evening.

Expert resized-HSH SpecialMortgage rates bounced higher last week, as minutes from the Federal Reserve’s last meeting and an answer to a Senator’s question by Federal Reserve Chairman Bernanke roiled the markets, causing a selloff in both stocks and bonds, with the latter subsequently lifting mortgage rates. In the end, really, nothing has changed very much.

How will the Fed’s exit affect mortgage rates?

Minutes of the Fed’s April 30-May 1 meeting exposed a willingness on the part of some FOMC members to consider winding down QE3 before too much more time has passed, possibly even as early as next month, provided the economy is producing enough growth to warrant such a change. Mr. Bernanke’s answer to a question about the timing of the beginning of a reduction in purchases of MBS and Treasuries seemed to suggest that September might be a more likely point.

With some uncertainty poured over the market, stocks and bonds both sold off, and mortgage rates moved closer to 2013 highs, just a few short weeks after hitting 2013 lows. Still, they are well anchored and remain near record lows.

Mortgage rates rose last week

HSH.com’s broad-market mortgage tracker–our weekly Fixed-Rate Mortgage Indicator–found that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming and jumbos) rose by eight basis points (0.08 percent) to 3.83 percent.

The overall average rate for 15-year fixed-rate mortgages (conforming, non-conforming and jumbos) managed a seven basis point lift (0.07 percent) to 3.05 percent for the week.

FHA-backed 30-year fixed-rate mortgages followed suit with a full tenth of a percent increase of their own, climbing to an average rate of 3.46 percent, while the most popular ARM–the 5/1 Hybrid–remained closest to its all-time record lows with just another two hundredths of a percentage point (0.02 percent) upward bump to 2.63 percent for the week ending May 24.

Chairman Bernanke’s remark

It may be that Mr. Bernanke’s remark wasn’t as off-the-cuff as it seemed, but instead intended to diffuse some expected reaction to the June timing that was intimated in the minutes. Perhaps it was to test the markets for a reaction; there was nothing in the Chairman’s prepared remarks before Congress to suggest any imminent change in Fed policy, and he even cautioned about the adverse effects of any near-term change. As well, in both recent statements and again in his testimony, Mr. Bernanke has noted that the Fed is “prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate…” and the Fed has continued to express concerns about the headwinds of federal fiscal tightening and the recessions/slow economies of our major trading partners.

For this week…

In the end, what has changed so much that the Fed would suddenly look to run to the exit? Nothing. The economy remains in a muted pattern at best, with serious obstacles preventing an easy shift to a higher gear. Will this change? At some point, yes, as will Federal Reserve policy. However, without robust economic growth, quickly falling unemployment or a hot flare of inflation, that point remains in the future… and when it comes, it will merely be the beginning of what is likely to be a protracted process of getting back to normal monetary policy.

For this week, a holiday-shortened one, mortgage rates will be higher, perhaps reaching the highest point of 2013 (not that we’re all that far from it at the moment). Best to figure on another 6 to 8 basis point rise.

HSH Associates Financial News Blog

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