Dude, Where's My Recession : Why Mortgage Rates Can't Find A Balance

What the Federal Open Market Committee did last week may not be as important as what it didn't do.

It didn't lower the Fed Funds Rate by 0.500%, opting instead for a 25 basis point drop.

Context is important here.  In the days preceding the FOMC's meeting, markets feared a recession.  The concerns are valid (and still exist):

• Weakness in housing is spilling over into the economy as a whole
• High oil prices could lead to inflation
• Shaky consumer confidence could foretell drops in consumer spending

But on some levels, all of these recessionary factors were already priced into the markets.  Inflation, on the other hand, was considered a non-factor.

And then... the jobs reports revised its old number sharply higher.

And then... businesses reported their biggest one-month spike in costs in 34 years.

And then... the cost of living rose to its highest year-over-year level since October 2005.

And then... consumers spent a lot more money than expected on holiday shopping.

And then... (actually, there's no more "and then").

So, when the FOMC didn't lower the Fed Funds Rate by 0.500%, it signals that the Fed is concerned about inflation and that is what is making mortgage rates bounce.

Inflation is the enemy of mortgage bonds, eroding their value, pushing mortgage rates higher.

The markets had thought inflation was a non-issue.  The Fed and recent data are telling us otherwise.  Even as housing continues to show weakness.

(Images courtesy: Econoday, You're The Man Now Dog)