This week will be interesting for the bond market and mortgage rates. There are five remaining economic reports scheduled for release, but only one of them is considered to be of high importance to the markets. With data being posted all but one day of the week, we may see some noticeable fluctuations from day to day in mortgage pricing.  Generally speaking, despite the lack of a data-packed calendar, I would still maintain constant contact with your mortgage professional.

Interest rates remained volatile last week as worries about inflation continued to influence the mortgage market.   Comments from the Federal Reserve indicated that the current rate of inflation is above desired levels.  When the Fed is concerned about inflation, they tend to raise interest rates.  We recommend locking now before they go up.

Inflation data continues to hammer headlines and our wallets. News this week demonstrated what we have all been feeling; prices are higher at the pump, the grocery store and anywhere else you use your debit card. Interest rates trade off of bond prices and bonds HATE inflation. Coupled with this is concern about a declining economy which could hold rates back a bit, but the overall trend is higher for those seeking a mortgage in coming months.

Volatility being what it is these days, mortgage rates bounce around a lot. Upward pressure for rates one day gives way to downward pressure the next, only to succumb to upward pressure again.

The see saw between concerns about growth and fears about inflation tilted toward the inflation side again this week, after Fed Chairman Ben Bernanke addressed Congress in the semi-annual report on monetary policy. While detailing the challenges facing the economy, Bernanke noted that inflation was above desired levels and that upside risks for higher prices have “intensified” lately. A Fed seeing higher inflation usually can be expected to react with an upward move to the Fed Funds and Discount Rates at some point in the not-too-distant future. In fact, the Federal Reserve Open Market Committee explicitly noted at its last meeting that “with increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate.”

Fed Funds Implied Probability

Ben Bernanke says US Monetary Policy is ‘well positioned’; Wachovia fell for second day after ousting CEO Kennedy Thompson; Analysis by Mark Howard, Barclays Capital Head of Credit Analysis.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.  Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh.  Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

2008 Monetary Policy Releases

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.  Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.

2008 Monetary Policy Releases

Federal Reserve Adds Liquidity to Money Markets. Analysis and Discussion with John Ryding of Bear Stearns.

The Eleventh Federal Home Loan District Cost of Funds Index increased for the second consecutive month in September, this time by more than 2 basis points.

The new index stands at 4.383%, its second highest point of the year, up from 4.359% in August. The only month with a higher index was January, at 4.392%.

It is coincidental that the Federal Home Loan Bank of San Francisco, which calculates the index, released it at the close of business on the same day the Federal Reserve Board cut the target federal funds rate by 25 bps.

COFI takes into account all sources of funds that thrift members use to originate mortgages, including deposits.

Since many financial institutions reduced their prime rate as a result of the Federal Reserve move, it could have an effect on COFI. But since COFI is a weighted average, it lags the overall market by three to six months.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent.

In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Awaiting the Federal Reserve Decision - We Say Lower By 1/2 Point. Sep. 17, 2007. 09:00 AM EST. Analysis and Discussion with Lee Smith of Cozad Asset Management; Broker Earnings Kick Off Tomorrow Before the Bell