Fed Turns More Hawkish
Most of the news over the past week was negative for mortgage rates. Comments from Fed officials and the Trump administration, along with the release of strong economic data, resulted in mortgage rates ending the week higher.
Recent hawkish comments from Fed officials have caused investors to significantly increase their expectations for a federal funds rate hike at the next meeting on March 15. For example, on Tuesday, influential New York Fed President William Dudley said that he sees a rate hike in the "relatively near future." As indicated in futures markets, investors now price in roughly a 75% chance of a rate hike at the March meeting, up from about 25% a week ago. Looser monetary policy has been good for mortgage rates in recent years, so these hints that the Fed may tighten at a faster pace were negative.
A speech by President Trump on Tuesday evening was also viewed as unfavorable for mortgage rates. In short, investors grew more concerned that expansionary policy changes will lead to higher future inflation, which would be bad for mortgage rates.
In addition, the economic data released over the past week generally continued to surprise to the upside. The Institute for Supply Management (ISM) Manufacturing Index rose to 57.7, far above the levels seen before the election, and the highest level in four years. Readings above 50 indicate an expansion in the sector. Consumer Confidence also has increased significantly since the election, and the February reading was at the highest level since 2001. Stronger economic activity increases the outlook for future inflation.
Looking ahead, Fed Chair Yellen speaks on Friday afternoon. Investors will be watching closely for clues about whether the Fed will hike rates at the next meeting on March 15. The ISM Services Index also will be released on Friday. The next European Central Bank (ECB) meeting will take place on March 9 and could influence U.S. markets. The key Employment Situation Report will come out on March 10. Comments from the Trump administration also could have an effect on mortgage rates.