No immediate need to lock

Following the Federal Reserve interest rate and policy announcement yesterday, mortgage bonds were able to break out of their downward channel.  The Fed finally backed off of their “4 rate hike in 2016” plan.  Although savvy investors could clearly see beforehand that 4 rate hikes were completely absurd, both the stock and bond markets celebrated on the news.  This created enough momentum for bonds to power through multiple layers of overhead resistance, reaffirming hope that mortgage rates would remain in the low range they have maintained for the past couple of months.  However, there are still two layers of resistance right overhead.  Therefore, it’s too early to celebrate as bonds could be pushed lower as they attempt to make a break higher. 

In her statement yesterday, Fed President Janet Yellen said that they believe we will hit the inflation target of 2% in 2018.  However, with the Consumer Price Index now showing an annual increase rate of 2.3% when excluding food and energy, it seems the Fed may be burying their head in the sand.  It is clear that falling oil prices slowed inflation in the past year.  However, oil prices have moved approximately 33% higher from their recent lows.  This is certain to stimulate higher levels of inflation in the near term.  The gauge the Fed is relying on is one that excludes changes is housing expenses, which we all know makes up a significant portion of most family’s household budgets.  If the Fed fails to raise short term rates to fight inflation as it moves higher, mortgage rate are certain to move higher. 

With bonds not trading between a floor of support provided by their 50 day moving average and a duel layer of overhead resistance, there is no rush to immediately lock.  However, it may prove to be an opportuning to lock in the gains from yesterday for those needing to close soon.