WeeklyBasis 12/18/09: Fed May Reverse Rate Stimulus Faster Than Expected

Rate/Market Update
Rates initially rose this week on a stronger-than-expected business inflation report Tuesday, but recovered after the Fed reiterated that they expect weak economic conditions to help keep rates lower for the near term. Rates end this week about the same as last week.

But it should be noted that Bernanke’s Fed is highly market oriented. Their post-meeting statements, like the one they issued Wednesday after their final 2009 policy meeting, don’t indicate this explicitly but the minutes of those meetings do. The minutes are very specific about how market oriented they are, and recent minutes describe how the Fed will look to raise rates by selling mortgage bonds and/or hiking overnight rates when they see more sustained economic improvement and/or inflationary pressure. Their first of eight 2010 meetings is January 26-27

Economic Preview Next Week
Some of this data will come next week with the final 3Q2009 GDP reading on Tuesday, which should confirm that the economy grew about 2.8%, the first growth (as opposed to contraction) number in five quarters. Personal Income/Spending and a key consumer inflation reading Wednesday: Personal Consumption Expenditures is the Fed’s favorite measure of inflation, so mortgage bond markets will sell off if it’s higher than expected. When bond prices drop in a selloff, rates rise. We also have existing and new home sales reports Tuesday and Wednesday.

CONFORMING RATES ($200,000 – $417,000) – 1 POINT
30 Year: 4.875% (5.02% APR)
FHA 30 Year: 4.875% (5.08% APR)
5/1 ARM: 4.0% (4.13% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 1 POINT
30 Year: 5.125% (5.26% APR)
FHA 30 Year: 5.125% (5.25% APR)
5/1 ARM: 4.5% (4.63% APR)

JUMBO RATES ($625,500 – $3,500,000) – 1 POINT
30 Year: 5.625% to 5.875% (5.78% to 6.02% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 5.25% (5.43% APR)