U.S Mortgage Rates Drop on FED Chair Upcoming Decision, What’s Next?

The market obsession over monetary policy turned a new leaf in the last week, with U.S Treasuries seeing increased volatility over noise hitting the wires of who is leading the pack to take the FED’s top spot on 4^th February.

Following initial reports last Monday of Trump being impressed by the particularly hawkish John Taylor, we saw yields on the bounce with Taylor’s monetary policy model suggesting that U.S interest rates should be nearer 3% compared with the current 1.25%.

With longer-term mortgage rates tracking 10-year Treasury yields, the prospects of a more hawkish FED Chair with a more aggressive plan to reach monetary policy normalization saw mortgage rates rise and then ease back as the markets shifted focus to Powell, whom many consider to now be the front-runner.

We have heard from U.S President Trump on his desire for a weaker Dollar and a continuation of the current low-interest rate environment and all things considered, a dove at the helm of the FED would certainly be more aligned to the President’s wishes. Not only would a continued low rate environment support disposable household incomes, but would also ensure that the U.S economy and households feel the full benefit of tax reforms.

Following a string of solid economic data out of the U.S in recent weeks, expectations of a December rate hike remain, but the reality remains that pressure will be on the FED to maintain its gradual move towards normalization and not steepen the yield curve. Adding to the downside in mortgage rates were the disappointing September inflation figures, which, to a certain extent, justified the FOMC doves how to continue to feel that inflation is showing little signs of heating up to warrant further rate hikes this year.

The Jury is out on this one and the FED Chair continues to believe that there is likely to be an imminent shift in inflationary pressures to justify a December move. We would expect mortgage rates to already reflect such a move by the FED at the end of the year, but for mortgage rates to really gain momentum, not only will there need to be a hawk sitting in the FED hot seat, but for wage growth to gain momentum in order to support a more positive outlook on inflation and begin to drive mortgage rates northwards.

It’s certainly a good time to be refinancing, particularly if current FED Chair Yellen is correct on her forecasts and the U.S President trumps the market by announcing John Taylor as Yellen’s successor. Such a move will most likely see mortgage rates begin to rise in anticipation of a steeper yield curve and for lower-income households, the much talked about tax reforms may just become a buffer.

According to the Mortgage Bankers Association, total loan application volume increased by 3.6% in the week ending 22^nd October, with refinancing accounting for 48.6% of total applications, while mortgages from purchase activity stood 9% higher year-on-year. Freddie Mac’s 30-year mortgage rate slipped from 3.91% to 3.88%, while sitting above 3.52% for the same time last year, with the FED having lifted rates twice this year alone.

Near-term, the direction will continue to be hinged on who is heading to the FED Chair and whether inflationary pressure begins to build, the U.S economy certainly not an issue in the eyes of rate setters.