While the Fed does not control mortgage rates directly, it’s important to remember that the Fed maintains an enormous influence. Mortgage rates are largely determined by mortgage-backed securities (MBS) prices. One primary reason why MBS have performed so poorly since last week’s Fed statement is clear. To boost the economy after the financial crisis, the Fed has taken extreme actions, including the purchase of enormous quantities of MBS, called quantitative easing (QE). This extra demand from the Fed has helped push mortgage rates down to record lows. The Fed has said from the start that these are temporary measures, though, and recent economic conditions have caused reduced expectations for another round of QE. The result is that investors are less inclined to hold positions in MBS if the Fed is no longer expected to be a major buyer.
On Wednesday, however, comments from Fed Chief Bernanke caused investors to question whether the shift in sentiment had gone too far. Fed officials may be more concerned about the risk of slower future economic growth than the consensus investor outlook might indicate. Many Fed officials remain open to the possibility that additional monetary stimulus may be called for, and the majority seem to prefer to be too slow to tighten monetary policy rather than too quick. Bottom line, in the near-term, mortgage rates will likely be heavily influenced, higher or lower, by changing expectations for additional Fed MBS purchases.
Pending Home Sales will be released today.
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