Economic Commentary for July 17th, 2013: Bernanke Helps Mortgage Rates

CPI

The overwhelming influence on mortgage rates continues to be expectations for future Fed policy. Soothing comments from Fed officials over the past week caused mortgage rates to move lower. In addition, the CPI and PPI reports released over the past week showed that inflation remained well contained, which gives the Fed additional flexibility in setting policy.

Added demand from the Fed’s bond purchase program helped push mortgage rates to historically low levels. As Fed officials have indicated that the end of the program is now in sight, mortgage rates have moved higher. Investors have experienced a great deal of uncertainty about the specifics of the Fed’s plans, and this has caused a high level of volatility. The timing for the Fed to begin to taper its bond purchase program is still unclear, as it will depend on the future performance of the economy. Events such as the stronger than expected Employment report and hawkish comments from Fed officials have caused mortgage rates to jump in recent weeks, while data or statements from Fed officials, which suggest economic weakness, have had the reverse effect. This volatility is likely to continue in the months ahead until the Fed announces a policy change.

The housing sector has been one of the bright spots in the economy in recent months. Even though mortgage rates have increased, housing market activity is expected to continue to improve. Recent forecasts from the National Association of Realtors and Freddie Mac predict additional progress in 2014 following substantial gains in 2013. According to the forecasts for 2014, home sales will increase 5% to 10%, while single-family housing will rise 10% to 20%. The most recent survey from the NAHB supports the positive outlook. The July NAHB Home Builder Confidence Index jumped sharply to the highest level since January 2006.

Looking ahead, July 31 will be the big day. That’s the date of the next Fed meeting. The second quarter GDP data also will be released that day. GDP is the broadest measure of economic growth. Investors expect to have a clearer idea of the Fed’s plans after the data and the FOMC announcement. Before then, the housing data will be the main focus. Outside the US, investors will be keeping an eye on the troubles in Portugal and Greece. The economic performance of China’s economy will also receive considerable attention.

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