Fed Changes Hurt Mortgage Rates

Dated: 12/19/2016

Views: 997

Wednesday’s U.S. Fed meeting was bad for mortgage rates. Recent economic data had little impact. As a result, mortgage rates ended the week higher.

The Fed’s 25 basis point increase in the federal funds rate was no surprise. Investors were far more interested in the outlook for future rate hikes. At this meeting, Fed officials accelerated their expected pace of future rate hikes. The Fed cited faster progress in meeting their inflation and labor market targets to explain the change. In 2017 for example, the Fed now anticipates three rate hikes, up from two at the September meeting.

The faster pace was negative for mortgage rates, as it brings the Fed closer to beginning to reduce its investment in mortgage-backed securities. The Fed owns over $1.7 trillion of agency MBS, and it replaces what it pays off with new purchases. It currently buys approximately 25% of new MBS. The Fed’s statement says that it will continue to do so until “normalization of the level of the federal funds rate is well under way.” It is hard to know how the Fed will determine when rates have been “normalized,” but each increase in the federal funds rate gets them closer to that threshold.

The report on retail sales released on Wednesday came in below target. Retail sales in November rose just 0.1% from October, well below the consensus for an increase of 0.4%. In addition, October’s results were revised lower.

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David Sarnowski

David is a seasoned real estate professional, specializing in residential sales, rentals and investment properties. David is a 15 year resident of the New Jersey Gold Coast, with the local knowledge n....

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