Back to Reality, Fed Finally Pulls Trigger
After holding the federal funds rate near zero for seven years, the Fed announced on Wednesday a widely expected rate hike of 25 basis points. Regarding future policy, investors were slightly soothed to hear that Fed officials expect that economic conditions will warrant only “gradual” increases in rates. The statement also noted that the Fed does not expect to reduce its holdings of MBS and Treasuries any time soon. For the most part, current mortgage rates already reflected the anticipated bump, but there was some additional upward movement following the news.
The Fed’s dual mandate includes striving for maximum employment and stable prices. There is little disagreement that the labor market has been steadily improving, but inflation has remained below the Fed’s desired rate. Now that the first hike is done, bond and mortgage rates will be increasingly sensitive to the monthly inflation and wage reports. Any hints of increased inflation going forward will have an immediate impact on mortgage rates.
Week Ahead
Factors: Core PCE price index, the Fed’s preferred inflation indicator, will come out on Wednesday. Mortgage markets often are more volatile than usual during the last two weeks of December due to lighter trading volumes.
Volatility: Moderate
Trend: Increasing
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