Fed Officials Influence Mortgage Rates

Fed officials’ comments, which were unfriendly for bonds, had the biggest influence on mortgage rates over the past week. Uncertainties related to the United Kingdom’s exit from the European Union (Brexit) offset a portion of the losses. Recent economic data had little impact. Mortgage rates ended the week higher.

On Tuesday, British Prime Minister Theresa May discussed the United Kingdom’s strategy for the negotiations to exit the European Union. According to May, taking control of the UK’s immigration policy will be a higher priority than remaining a member of the EU’s single market. It is very difficult at this point to predict the impact that Brexit will have on European economic growth. Investors reacted to the uncertainty about the economic outlook by shifting to safer assets, including U.S. mortgage-backed securities (MBS), which was good for mortgage rates.

On Wednesday, however, the Fed’s Robert Kaplan came out in favor of tighter monetary policy due to improvement in the economy. Of note, he thinks the Fed should soon begin to consider a reduction in its large holdings of Treasuries and MBS. Fed Chair Janet Yellen gave a speech later on Wednesday and another on Thursday in which she touched on similar topics. Yellen said that a gradual tightening of monetary policy is appropriate, and that it will take place through federal funds rate hikes and changes in the Fed’s balance sheet. Any plan to reduce the Fed’s holdings of MBS would be bad for mortgage rates; rates rose following both Kaplan’s and Yellen’s speeches.

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