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YELLEN SUPRISES INVESTORS !

A short comment by Fed Chair Janet Yellen caught investors off guard on Wednesday, and the reaction was not good for mortgage rates. In addition, a reduction in tensions in Ukraine caused investors to return to riskier assets, hurting safer assets such as mortgage-backed securities (MBS). As a result, mortgage rates ended the week higher.

As widely expected, the Fed scaled back its bond purchases by $10 billion to $55 billion per month. According to Yellen, if the Fed’s economic outlook does not change significantly, the bond purchases are expected to end in the fall of this year. Fed officials have long maintained that they expect that the fed funds rate, the Fed’s primary tool for monetary stimulus, will remain near zero
for a “considerable period” of time following the end of the Fed’s bond purchases. The big surprise came during Yellen’s first press conference as Fed Chair, when she defined the meaning of a “considerable period” as about six months. This would place the first fed funds rate hike in the spring of next year. Before Yellen’s comments, the market consensus was for the first rate hike to take place near the end of next year.  While mortgage rates are not directly tied to the fed funds rate, the economic strength implied by the expected timing of the first fed funds rate hike was unfavorable for bonds of all maturities.

The housing reports released this week revealed that conditions in February were little changed from January. February Existing Home Sales decreased slightly from January. Total inventory of existing homes available for sale rose 6% to a 5.2-month supply.

February Housing Starts declined slightly, while Building Permits increased 8%. The March NAHB Housing Index showed that home builder confidence increased slightly. It is widely believed that housing activity over the last couple of months has been depressed by the unusually severe winter weather, which means the pent up demand could be a positive in coming months.

There is a wide range of economic data for investors to consider next week. The primary reports will be New Home Sales, Durable Orders, Pending Home Sales, and Core PCE inflation, the Fed’s preferred inflation indicator. Personal Income, Consumer Sentiment, and Consumer Confidence will round out the schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Changes in the situation in Ukraine also could influence mortgage rates.