Bernanke Sparks Rate Rally

Federal Reserve Board chairman Ben Bernanke helped spark a rally in 10-year Treasuries in June by reiterating a policy of "vigilance" in fighting inflation, which the market largely interpreted as foreshadowing additional hikes in short-term interest rates.

Some economists suggested the Fed's anti-inflation stance could portend a slowdown in economic growth, but will it be enough to push down mortgage rates? Could the industry be headed toward another unexpected refinancing boom?

Most economists don't think so, and continue to forecast that mortgage rates will rise, although very modestly, between now and the end of 2006. But everyone agrees that an awful lot depends upon how Mr. Bernanke manages monetary policy in the face of possible inflation threats. Meanwhile, trading in Treasury futures in mid-June, just before the release of key consumer price data, suggested that the market anticipated about a 50% likelihood the Fed would raise rates again at its next meeting in late June.

"It is very hard to speculate on these things, and the Fed never wants to show their hand too clearly, so it is still everyone's guess as to what they are going to do on June 29," said Frank Nothaft, chief economist at Freddie Mac.

Freddie Mac's own data show that mortgage rates, which had been rising in recent weeks, stalled in early June after the Fed chairman's hawkish comments about "worrisome" inflation data.

Still, Mr. Nothaft said market sentiment is that even if the Fed raises its key short-term interest rate by another 25 basis points on June 29, it will probably pause after that "to see how the economy evolves over the rest of the summer." In the meantime, Mr. Bernanke's comments are designed to make his monetary policy clear to the market, Mr. Nothaft said.

"The last thing he wants to do is let the inflation genie out of the bottle, but he also doesn't want to bring the economy to a standstill."

In the meantime, a weak jobs report for May helped spark a bond rally in June, with the 10-year Treasury rate dipping below 5% for a while. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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