I know that every time the federal reserve meets I can expect to field a number of phone calls from my clients all over Oregon.
As I expected today the federal reserve cut the federal funds rates by another 50 bps (bps is short for basis points, and 50 bps means .50%). This follows an unexpected cut of 75 bps last Tuesday, conintuing the cuts that began last Summer.
If you look at a graph, you can see that each time there was a rate cut, mortgage bonds actually went the opposite direction in the immediate aftermath.
The reason for this is simple. As mortgage rates reach a certain level, the mortgage bonds that investors buy lose their value (perceived value) due to investors looking at one thing...inflation.
The federal reserve cuts rates to help stimulate the economy, which leads to more investing, more productivity, more employment, and often inflation will follow. They raise rates in order to keep inflation in check and slow the economy. If there is risk of inflation, mortgage rates will rise as investors will see that they need a higher return in order to outpace inflation or else they will be going backwards.
So, we have seen mortgage rates drop this past six months but now mortgage bond investors are wondering what's next? If we are nearing an end to these cuts, thant it would appear that as the economy begins to gain hold we could see inflation rise, and rates will follow.
The next two weeks should give us a good idea of where the economy is headed as there are numerous reports scheduled to be released on jobs, inflation, retail/wholesale cost of goods, and overall economic growth.
If you'd like to keep up-to-date on the weekly happenings in the mortgage market, check out my weekly newsletter by clcking the MMG Weekly logo on my sidebar.
John
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