Rates Take Spike After Fed Comments



June was a horrible month for mortgage interest rates. Interest rates hit their recent lows in May when the average 30-year fixed rate loan was 3.4%. Rates for the last week of June hit 4.45% a jump of just over one hundred basis points. In the second quarter, the quarterly rise in rates was the highest since the fourth quarter of 2010.

The catalyst for the rate jump was Wall Street’s reaction to the Federal Reserve Chairman Ben Bernanke’s June 19 news conference.

The following are the comments that moved the markets: “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.”
After the extreme move in the markets, there has been a lot written about the likely overreaction of the markets to Bernanke’s words.

Wall Street Journal economics editor David Wessel wrote a column, “A Hawkish Signal Bernanke Didn’t Send,” He wrote the markets overreacted to the Fed’s statements. “Futures markets are betting the Fed might lift short-term rates from zero as soon as mid-2014. “That is neither what Mr. Bernanke expected nor what he meant.” Wessel explained that Bernanke said, “There is no change in policy here” at the Fed’s news conference.

After reactions to Bernanke’s statement, the Fed started to clarify the Fed’s positions to temper the market reactions. Fed Governor Jeremy Stein was quoted as saying that the Fed did not want to raise rates until 2015 or later.

Even St. Louis Fed President James Bullard, who is known as an interest rate and inflation hawk, shifted his position on raising rates. He has acknowledged that inflation is running substantially below the Fed’s 2% target.

The Fed has set a long-term inflation target of 2% when the bank would begin to tighten monetary policy. Inflation remains very low.

Jeremy Siegel of the Wharton School of Economics wrote that partially due to the change in demographics – the population is getting older and will spend less and invest more conservatively. This will help to keep interest “rates low for years to come.”
Historically speaking, rates are still attractive.

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