12 Jul Fed to Focus on Balance Sheet
The stock market hit an intra-day all-time high in early morning trading. The market was driven higher by words spoken by Fed President Janet Yellen that indicated we may see the Fed slow down their path of rate hikes and shift their focus to reducing the balance sheet. We feel the Fed could be done with rate hikes this year or possibly sneak one more in, and then they will hold off on future rate hikes to focus on the balance sheet. The reduction of the Fed’s balance sheet, which will likely be branded as, “Quantitative Tightening,” will certainly impact mortgage interest rates. As the Fed reduces their purchases of US Treasuries and mortgage backed securities, there will be added downward pressure to both investments, which translates to higher interest rates.
Janet Yellen’s statements relating to the economy were focused on inflation and the labor market. Since the reduction in inflation levels has been heavily tied to low oil prices, the Fed feels that this trend will reverse soon and that we will see inflation rates move higher. She also feels that with the tight labor market, it has been difficult for businesses to grow due to the challenges of not finding qualified workers. If we can find a way to move some of the population who is currently living off government entitlements into the labor force, this pressure will reduce and we could see our job market make more significant gains.
In an unlikely fashion, mortgage bonds are improving with the stock market. Mortgage bonds were able to move above their 100-day moving average, however, there is a bond auction today at 11:00 am MST that could change things. If you can’t watch the markets closely, we will maintain our locking bias. If you are, you can carefully float as see if the auction helps drive bond prices higher. If we see markets turn negative, lock.