The Federal Open Market Committee adjourns from a two-day meeting today and so this is a good time to remind yourself: The Fed does not control mortgage rates. 

Rather, the Fed sets the Federal Funds Rate.

And the FFR is, in turn, used to determine Prime Rate.

Prime Rate, in turn, is used to determine the rates for credit cards, charge cards and home equity lines of credit. 

This is why today’s meeting should be important to holders of debt — the Fed’s decision to lower, raise or hold the FFR at its current level can impact the spending of every American household.

The Fed is widely expected to hold the Fed Funds Rate steady today, but Ben Bernanke & Co will issue a press release discussing the group’s view on the economy and the outlooks for the future. 

It is the statement that has the biggest influence over mortgage rates.  If the FOMC expresses concerns about inflation, mortgage rates should jump in response.  Naturally, the reverse is true.

Yesterday, after starting the day with strong improvement, mortgage bonds gave up their gains to end the day flat.  Today, bonds are already trending lower (which means higher mortgage rates).

One thing is for sure: there is a lot of uncertainty surrounding today’s press release and traders are unsure of what bets to make next.

(Image courtesy: Wall Street Journal)

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2 thoughts on “Which Way Will They Go? Inflation Up, Growth Down, Or Both?

  1. Phoenix – As there were no major data releases last week, the markets will most likely move on momentum and psychology. That’s precisely what pushed mortgage rates lower over the past ten days.

    However, beginning in March, mortgage markets started to change their bets about the Federal Reserve’s next steps with the Fed Funds Rate. Previously, investors believed that the Fed would lower the FFR in the first half of 2007, signaling a tamer inflation outlook in the economy.
    Data didn’t support that view, though.

    Then, at the Fed’s May meeting, the tide really turned as the nation’s monetary policymakers noted how housing was cooling off, but that the economy was roaring ahead despite that.

    And that’s right around when the bond market started to take it on the chin.
    Well, the Federal Open Market Committee met again this last week for a two-day meeting, adjourning Thursday. The markets will be closely watching every word from Ben Bernanke & Co. to see if the new bets they’ve made on the economy and inflation will be backed up by the Central Bank.

    Know that doesn’t totally answer your question, however my gut is telling me it will impact other sales.

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