So much for market calm.
The mortgage market tanked yesterday when, in response to conflicting data about growth and inflation, San Francisco Fed President Janet Yellen said “watchful waiting” is the Fed’s likely next step.
This surprised markets because most expect the Fed to lower the Fed Funds Rate within the next few months.
The Fed Funds Rate does not control mortgage rates, but it can have an impact.
This is because the Fed Funds Rate is related to Prime Rate, the basis for most bank-to-business lending (i.e. business loans) and bank-to-consumer lending (i.e. credit cards, home equity lines of credit).
When the FFR drops, it’s signals that inflation is less of a threat and that is what moves mortgage rates. As the cost of living slows (or falls), mortgage rates tend to fall with it.
So, when Yellen alluded that the Fed may not drop the FFR as soon as markets anticipated, it signals that inflation is still a concern. Mortgage markets unwound in response and rates surged higher.
(Image Courtesy: Federal Reserve)