Last week we delved into the Federal Reserve and “tapering.” Specifically, we explained why we thought the Fed was unlikely to materially reduce its purchases of mortgage-backed securities (MBS) this year.

Mortgage rates have risen on the precept that the Fed was indeed shifting its policy toward purchasing fewer MBS. Lower Fed demand for MBS, would, in turn, lead to higher yields in order to increase more private-buyer demand. Last week we mentioned that reduced MBS supply may have played a role in reduced Fed purchases.

We can add a couple more reasons why think the Fed's appetite for MBS hasn't diminished: For one, employment and wage growth is still anemic. The Fed has hinted that it won't materially alter quantitative easing (buying MBS and U.S. Treasuries) until the unemployment rate drops to 6.5%; it's currently at 7.6%. In addition, manufacturing has weakened in recent months, which suggests economic growth also has room for improvement.

We'll have more insight into the Fed's “ tapering ” leanings this coming Wednesday after the board of governors meeting and the subsequent press conference. We expect that the Fed won't announce any material changes to its policies. Therefore, we don't expect mortgage rates to move materially higher. You'll note in the above Bankrate.com graph, rates have been plateauing.

With that said, we don't expect rates to move materially lower either, so the risk of waiting remains.

Courtesy of Jessica Regan.

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