Dovish Statements from Yellen
During a light week for economic data, the biggest influence on mortgage rates was testimony from Janet Yellen. Yellen, the nominee to be the next Fed Chief, revealed strong support for the Fed’s bond buying program. This news helped mortgage rates end the week lower.
Janet Yellen testified this week at her confirmation hearing to replace Ben Bernanke as the Chair of the Fed. Essentially she stated that the Fed will continue the policies currently in place. She emphasized that the Fed’s monetary stimulus is appropriate to help boost the economy. According to Yellen, Fed officials are looking for signs of sustainable economic growth which will “promote continued progress” before they begin to scale back the Fed’s bond purchases. In short, her comments suggested that the Fed is in no rush to tighten monetary policy.
Investors viewed Yellen’s dovish comments as good news for both stocks and bonds. At its current pace, the Fed is purchasing the majority of newly issued mortgage-backed securities (MBS) each month. Since mortgage rates are determined in large part by MBS prices, this enormous added demand from the Fed for MBS has helped keep mortgage rates low. Economic news which causes investors to shift their outlook for the bond buying program causes a significant reaction in mortgage markets, as seen following last Friday’s stronger than expected Employment report.
The most significant economic data next week will be the Retail Sales data and the monthly inflation reports. Retail Sales account for about 70% of economic activity and will be released on Wednesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, also will come out on Wednesday. CPI looks at the price change for finished goods which are sold to consumers. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Thursday. In addition, Existing Home Sales will be released on Wednesday and Philly Fed will come out on Thursday. The Minutes from the October 30 Fed Meeting will be released on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials.