Mortgage Rates Moving Down After Yellen's Speech

Mortgage rates fell quickly this afternoon following the Federal Reserves updated economic projections.  While it is indeed true that the Fed "raised rates" this afternoon, the rate the Fed adjusts (aptly named, the Fed Funds Rate), governs only the shortest-time frames (overnight loans among big banks).  Although its effects radiate to longer-term debt like mortgages, the two are far from joined at the hip. 

Two Fed FOMC members did vote against the increase.  Interpreting the statement market’s initial reaction was that the Fed will move three times in 2018 as was widely believed.  A word of caution however, it is not a sure thing yet and is dependent on economic improvement and some belief inflation is moving up. Nevertheless, that is the consensus momentarily. Bank Prime rate now 4.50% now.

Even before the Fed news came out, a weaker reading on an important inflation report helped bond markets get into positive territory on the day.  The net effect of the Fed and the economic data was a moderately quick move back to last week's low rates.

Yellen’s last press conference at 1:30 began with the bellwether 10yr at 2.37% and MBS prices +22 on the session. By the time she finished the 10yr was at 2.35% and MBS prices +30. On Bitcoin question she danced around it on questions of what the Fed thinks. Her comment was the Fed will monitor banks closely in use of any bitcoins, and she leaned on its use as a money laundering vehicle. She commented that central banks may be looking to their own digital currencies but also made a point that the Federal Reserve is not yet seriously thinking about it; calling bitcoin an unstable market. She also warned of the increasing US debt level. 

Tomorrow many key data points - November retail sales, export and import prices, and October business inventories.

Congressional Republicans have reached a deal on final tax legislation, the top Senate Republican tax writer said, with President Donald Trump saying minutes later he would back a corporate tax rate of 21% from 20% he wanted, a minor concession. A top individual income tax rate of 37%, down from the current 39.6% level.  And a $10,000 cap on deducting state and local property or income tax payments. Senate Finance Committee Chairman Orrin Hatch said a final vote could begin in the Senate as early as Monday. The budget deficit caused by the tax cuts will add about $1.4 trillion to the federal deficit over 10 years. Current deficit is $20 trillion - if recent history holds the deficit in 10yrs will exceed $28 trillion.

Like clockwork… again. The 10yr briefly increased to 2.42% in very early trade this morning but as it did two weeks ago drop back to 2.40% then this afternoon the yield continued to decline on the lack of inflation noted by the FOMC and the Fed’s quarterly forecasts. At 2.35%, the 10yr is likely to move to 2.32% where it has been stopped since the end of September (a couple of breaches) but were quickly reversed.

In summary, bonds rallied following the Fed announcement today and weaker inflation data. Hopefully this rally can continue…