In the latest news from the United States mortgage market, the Fed Chair Yellen testimony calls for an increase to the federal funds rate. The Fed Chair presented today in her semi-annual address to Congress.

Additionally, Fed Chair Yellen said that it would be “unwise” to wait too long to hike rates. This holds potential to impact holdings of mortgage-backed securities in the upcoming months. Investors eagerly anticipate the outcome moving forward. Thus, mortgage-backed securities declined. When mortgage-backed securities decline, mortgage rates generally rise.

Yellen Testimony Calls for Increase in Federal Funds Rate

When the Yellen testimony called to raise the federal funds rate, she specified “further gradual increases”. Ideally, this approach to the economy set its up for continual progress in the coming year. Also, Fed Chair Yellen later added insight into the Federal Reserve’s plan for coming months.

Ultimately, the Federal Reserve intends to begin reducing its holdings of mortgage-backed securities. Of note, Fed Chair Yellen mentioned that the Federal Reserve does not plan to sell mortgage-backed securities to shrink its holdings. However, the Federal Reserve laid the groundwork to cease its replacement of principal reductions.

Mortgage-Backed Securities Reaction to Testimony

As the Yellen testimony calls for an increase to the federal funds rate, we will have to wait to see its long-term implications for mortgage-backed securities. Overall, the expected pace of tightening by the Fed rose a little after her testimony.

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