Mortgage rates will not get a helping hand from the bevy of data released this morning.
As markets anticipated, headline data supports the notion that the Fed will raise the Fed Funds Rate from its current 5.250% level before lowering it.
This is completely opposite from what we were seeing just two months ago.
The graph above shows how the market's expectation of the Fed have changed since March.
- The colored lines represent the Fed Funds Rate as set at the FOMC's August meeting.
- The x-axis represents time
- The y-axis represents the percent likelihood of an event happening
So, moving from left-to-right, we can see how the markets gamble on the Fed Funds Rate.
On March 13, there was an equal probability -- 30 percent -- that August's Fed Funds Rate would be the same today (5.250%) as that it would drop to 5.000%.
Today, markets predict with 95% certainty that the rate will remain unchanged with just a 2% chance that it will drop. Today's employment data should push that spread even wider.
Remember: the Fed does not control mortgage rates, but it does raise the Fed Funds Rate when it believes inflation is running too hot for comfort and inflation is the enemy of mortgage bonds.
So, when the Fed Funds Rate increases, it sends a signal to mortgage bond markets and that is what can move mortgage rates. The expectation of the FFR increasing is impacting markets more than the actual action itself.
If you like graphs and wanted an illustration to support the rapid rise in mortgage rates, this is it.
(Image Courtesy: Federal Reserve Bank of Cleveland)
