Market Commentary After Feds Hike Rates
There was a great deal of volatility in financial markets ahead of Wednesday’s highly anticipated Fed announcement. The net result for mortgage rates was that they ended the week a little higher.
After holding the federal funds rate near zero for seven years, the Fed announced a rate hike of 25 basis points, as widely expected. Investors are now asking what the pace of future rate hikes will be. According to the Fed statement, Fed officials expect that economic conditions will warrant only “gradual” increases in rates. The statement also noted that the Fed does not expect to reduce its holdings of MBS and Treasuries any time soon. Fed officials said that there has been “considerable improvement” in the labor market and that they were “reasonably confident” that inflation would rise to their target level. Investors were pleased that the Fed does not appear to be in any rush to take the next steps to tighten monetary policy, and mortgage rates declined a little after the release of the statement.
One reason behind the Fed’s decision to hike rates has been an increase in core inflation levels. One widely followed indicator released on Tuesday, the consumer price index (CPI), showed that core inflation in November was 2.0% higher than a year ago. Core inflation excludes the volatile food and energy components. This was the highest reading since May 2014. In January, core CPI was just 1.6%.
Looking ahead, the Philly Fed regional manufacturing index will be released on Thursday. Existing home sales and revisions to third quarter GDP will come out on December 22. A wide range of reports will be released on December 23 ahead of the Christmas holiday. Mortgage markets are often more volatile than usual during the last couple of weeks of December due to light trading volume.
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