Shift in Outlook for Fed Policy
Stronger than expected economic data and a shift in expectations for Fed policy were negative for mortgage rates over the past week. As a result, mortgage rates ended the week higher.
Speeches made by Fed officials during the first part of the week alerted investors that the Fed may be much closer to another federal funds rate hike than investors expected. On Wednesday, the release of the minutes from the April 27 Fed meeting confirmed this. In the minutes, Fed officials made it clear that they will consider raising rates as soon as June if economic conditions continue to improve. Investors currently view tighter Fed policy as negative for mortgage rates, so rates rose as the Fed’s position became better understood.
One factor supporting the case for tighter monetary policy is stronger than expected improvement in the recent housing data. Existing home sales in April rose for the second straight month and were 6% higher than a year ago. Inventories of existing homes available for sale jumped 9% from March. Sales of existing homes make up about 90% of the market. Housing starts, an indicator of future sales activity for newly built homes, increased 7% in April from March.
Complicating the decision for the Fed a little is the recent inflation data. The core consumer price index (CPI) in April was 2.1% higher than a year ago, down from a multi-year high of 2.3% in February. After rising significantly for several months, core inflation has declined for the last two months. If this trend continues, it would make the Fed less likely to raise rates.
Looking ahead, the new home sales data will be released on Tuesday. Durable orders and the pending home sales data will come out on Thursday. The second estimate of first quarter GDP, the broadest measure of economic growth, will be released on Friday. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Several Fed officials are scheduled to make speeches next week as well. Mortgage markets will close early on Friday in observance of Memorial Day.
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