In the Fed’s statement, they said that ongoing increases would be appropriate and they would continue their balance sheet reduction. Another sticking point was the Fed Funds Rate outlook. 17 of 19 members in the Fed forecasted a Fed Funds Rate of over 5%.
Sentiment did shift during Fed Chair Powell’s Q&A session when he acknowledged that “the inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases.” He also added that there would be a 25-basis point hike for the February 1, 2023 Fed meeting. This speaks to the Fed getting inflation under control and slowing the pace of their hikes.
So, what does all this mean? Well, it shows that inflation is slowing. This is indeed a great indicator for mortgage bonds. Afterall, the arch enemy of mortgage bonds is inflation. When inflation increases, mortgage bonds drop in price as it lessens the investor’s appetite, which makes mortgage rates increase. When inflation decreases, mortgage bonds typically improve in price making mortgage rates come down. It is encouraging that inflation is coming down. If inflation continues to lower, it should result in lower mortgage rates.
Source : mbshighway.comBy: Jon Iacono