Monday Market Commentary: FedSpeak Alters Rate Outlook

by Alex Stenback on January 14, 2008

Last Week:
When it comes to the Fed, words are often more important than deeds.  In other words, what Fed officials say publicly often has more impact on the direction and level of mortgage and other interest rates than what they actually do with rates. 

Case in point, a speech last week by Fed Chairman Ben Bernanke, at the Women in Housing and Finance Luncheon in Washington DC.  In his comments (full text here,) Chairman Bernanke touched on just about everything, and suggested strongly that further interest rate cuts were imminent.  The key phrase:

However, in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary…we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

Which in Fedspeak, translates into, "we are going to cut rates as low as and as long as it takes to end the threat of recession."  The result? The prospect of a 1/2 Point rate cut on January 30th is at nearly 60%, and Mortgage rates are now testing the lowest level since August 2005.  That’s the good news.

The Bad news is that mortgage rates often go up after the Fed cuts, so a 1/2 point cut at the end of the month may actually push rates up a bit.

This Week:
On the economic calendar, Retail Sales (Tue), Producer Prices (Tue), Consumer Prices (Wed), The Philadelphia Fed Index (Thurs, a measure of economic strength) figure to be the primary drivers of mortgage rate movement.  Signs of economic weakness will help rates move lower, especially if inflation remains anchored at current levels

We’ve also got Citigroup earnings on Tuesday, and they are expected to announce mortgage related writedowns of up to $24 Billion.  Major writedowns here could put further pressure on stocks, and the benficiary of poor stock market performance is, you guessed it, bonds.

The stage is set for mortgage rates to move lower, and the fundamental picture seems to favor this outcome.  However, we are testing multi year low-points, and these technical resistance points can be awfully hard to break, so don’t be surprised if rates get a little worse before they get better.  Patience may be rewarded.
This Week’s Economic Calendar [Barrons]

{ 1 comment… read it below or add one }

Eric January 30, 2008 at 2:23 pm

After todays rate cut, where do you see the mortgage rates for 30yr fixed going in the coming 30-45 days?

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