Fed Officials Appear Divided

Speeches from Fed officials caused some volatility in mortgage rates over the past week. The conflicting comments were mostly offsetting, however, and the net impact was small.
On Tuesday, a speech from the Fed's William Dudley was unexpectedly hawkish. Dudley said that “we are edging closer” to the appropriate time for a rate hike and that “it's possible” that it could happen at the September meeting. Wednesday’s Fed minutes from the July 24 meeting revealed that Fed officials are divided about the appropriate timing for tighter monetary policy. On Thursday, the Fed’s James Bullard was decidedly dovish. He said that the current “regime” of low growth and low inflation seen in the U.S. economy means that likely only one rate hike will be necessary over the next couple of years.
While the Fed does not have direct control over mortgage rates, Fed policy has had a major effect in recent years. In particular, the quantitative easing programs involved Fed purchases of massive amounts of Treasuries and mortgage-backed-securities (MBS). This added demand helped push down mortgage rates to their current low levels. These securities remain on the Fed’s balance sheet. The Fed has stated that they expect to eventually reduce their holdings of MBS, most likely after several rate hikes have taken place. When the Fed announces a plan to do so, it will be negative for mortgage rates. The slower the pace of rate hikes, the longer before the Fed begins to reduce its portfolio.

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