Fed Policy Drives Rates

The primary influence on mortgage rates last week was shifting expectations for Fed policy. Fed Chief Bernanke eased investor concerns about tighter monetary policy, causing mortgage rates to end the week lower, reversing a good portion of the prior week's increase.

To boost the economy in recent years, the Fed has used a variety of tools, which helped push mortgage rates down to historically low levels. Now that the economy is improving, Fed officials have indicated that it may soon be time to begin to scale back one of its tools, the bond buying program. As expected, mortgage rates reacted to the announcement on June 19 by climbing higher, but the magnitude of the move surprised many investors. Since then, there has been a great deal of uncertainty about the timing for the Fed to begin to tighten monetary policy. Volatility has been extremely high, as economic reports and comments from Fed officials have caused investors to adjust their expected timelines almost daily.

Following the stronger than expected Employment data released on July 5, investors shifted forward their expectations for Fed tightening, and mortgage rates swiftly increased. Sentiment reversed last week, however, due to a speech late Wednesday by Bernanke. The Fed Chief strongly stated that Fed officials feel that "highly accommodative" monetary policy will be appropriate for a long time. Bernanke's comments soothed investors, causing stocks to rise and mortgage rates to fall.