Fed Guidance May Change

Increased concerns that the Fed will raise the fed funds rate more quickly than previously expected was the driving factor for mortgage rates this week. Stronger than expected economic data was another negative factor, and mortgage rates ended the week higher.

A report from the San Francisco Fed released this week caused investors to question their outlook for future Fed policy. The report called attention to a discrepancy between investor expectations for the pace of fed funds rate hikes and the forecasts from Fed officials themselves. In short, the report points out that Fed officials are less dovish than investors think. There is growing concern that next week's Fed announcement will open the door to a fed funds rate hike sooner than previously expected. Highly accommodative monetary policy has helped keep mortgage rates low in recent years, so the prospect of tighter policy was unfavorable news. 

The surprise came from a significant upward revision to the flat reading in July. Instead of stalling in July, Retail Sales actually continued to improve at a moderate pace. Unfortunately, stronger economic growth is negative for mortgage rates, as it increases future inflationary pressures. 

The big story next week will be Wednesday's Fed meeting. Investors will be looking for a change in language which will make the timing of the first fed funds rate hike more dependent on the performance of the economy and less on guidance toward a specific date. Next week's economic data will include important inflation and housing data. The Producer Price Index (PPI) will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. The NAHB Housing Survey also will come out on Wednesday and Housing Starts will be released on Thursday. Industrial Production and Philly Fed will round out the schedule. In addition, investors will be keeping an eye on the conflict in Ukraine and the independence vote in Scotland. 

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