Until the recent past, interest rates were driven by the economy: recession or expansion, job growth, inflation, risk aversion, productivity, etc. These factors would converge to form an interest rate that best reflected consumers and investors expectations.

It's different today. The Federal Reserve is the overriding factor in lending markets. Everyone is trying to game the Fed's next move on quantitative easing. Specifically, everyone is attempting to forecast when the Fed will begin tapering its purchases of Treasury notes and bonds and mortgage-backed securities. The Fed's purchases – its demand – for these instruments is largely responsible for the low lending rates we've enjoyed over the past few years.

The chief reason mortgage rates moved so high so quickly in past months is that many market watchers expected the Fed to begin tapering next month. Markets, after all, are anticipating entities (they act on expectations), so mortgage rates naturally move higher on the prospect of higher rates.

Based on the minutes of the last meeting of Fed governors, the Fed is unlikely to begin tapering as early as September. Inflation remains low and job growth remains sluggish. We don't expect either to pick up soon, which is why we think tapering could be delayed until later in 2013, and possibly into 2014.

But as long as market participants are anticipating higher interest rates, there is a good chance rates will continue to rise. (Paradoxically, when the Fed actually begins tapering – when expectations become reality – rates could actually fall.)

Needless to say, this is confounding market, but it's still one in which we think it's more prudent to act today than to wait and anticipate tomorrow.

  Courtesy of Jessica Regan.

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