Friday, November 12, 2004

How Fed Hikes Impact Long Term Mortgage Long-term rates generally rise to some degree as the Fed tightens monetary policy, particularly when it's clear that the Fed is embarked on an extended tightening process.

Between June 29 and Sept. 22, the 10-year Treasury yield declined by 65 basis points while the federal funds rate rose by 75 basis points. At that time we saw long term rates plummet and short term rate rise.

How could this happen? First, evidence of the mid-year "soft patch"in real economic growth; second, the slowing in core inflation from the surprising acceleration earlier in the year; and third, lower probabilities of aggressive tightening by the Fed down the line.

The "soft patch" is becoming passe, and the transitory factors that boosted core inflation earlier in the year apparently have unwound. That said we now see mortgage rates rising steadily and can expect this to continue as the Fed execute further rate hikes in the months to come.

If the hikes are small and spaced consumers have a chance to lower mortgage interest rates on long term home loans by refinancing at low rates points and fees and take advantage of a rapidly shortening window of opportunity to get back future income loss.