Monday Market Commentary: Mortgage Rates Climb After Fed Cut

by Alex Stenback on September 24, 2007

                                                                          Graphic via MSNBC
Last Week:
The Fed Cut the Fed Fund and Discount Rate, and mortgage rates of the 30 year fixed variety went up.  This may seem counter-intuitive, but it’s all about inflation.  Here’s How (gross oversimplification alert): The Fed move weakened the dollar, and a weaker dollar ads inflationary pressure on the economy, and long term yields (30 year fixed rates, for instance) have to rise to offset the projected inflationary pressure.  In other words, if you are a mortgage bond investor, inflation will eat into your return, so in order to attract these investors, lenders must give them a higher rate of return.  That higher "rate of return" for a mortgage bond is, of course, a higher interest rate for you on your home loan.
This Week:
The economic calendar is adorned with mostly second-tier data this week.  Friday’s personal consumption expenditure index – a measure of inflation – will be the key release that could drive interest rates on its own. However, any "upside" suprises in the other reports (home sales, durable goods, and GDP data) could rally stocks and send rates higher.
This Week’s Economic Calendar [barrons]

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