The Mortgage Reports

Never doubt the power of worms words.

Mortgage rates had trended higher throughout May, but when Ben Bernanke used the word "inflation" 55 times in a speech June 4, that trend turned into a spike.  Rates are much higher now and home buyers are feeling the pain.

The chart above is for illustration purposes; it doesn't relate to mortgage rates directly.  But, it does give some insight into market mentality because it's tracking something called Fed Funds Futures.   

Fed Funds Futures is the market's general prediction of the Fed Funds Rate and how the Federal Reserve is expected to tinker with it.  Typically, the Fed Funds Rate rises with inflation.

Today, the Fed Funds Rate sits at 2.000 and represented by the brown line.

According to the chart, markets chance an August rate hike at 45 percent, believing that Ben Bernanke & Co. will respond to the three major inflationary threats to the economy:

• Rising energy prices
• Rising living expenses
• A weakening dollar

Markets believe the Fed will respond to these pressures because Bernanke told them to believe it in his speech June 4. 

Therefore, it's no surprise that when the market opened June 5, traders started to shift their portfolios away from inflation-sensitive securities, including mortgage-backed bonds.  This lowered demand for mortgage bonds which increased mortgage bond supply which, ultimately, pushed down mortgage bond prices.

In the bond world, lower prices mean higher rates and this is the chain reaction that makes inflation the enemy of mortgage rates.  It's why mortgage rates increased with a tremendous amount of speed beginning June 5.

It was all related to inflation.

Fed Funds Futures charts do little to predict mortgage rates because the FFR is a tool that predicts the future and mortgage rates are in the "now".  But, as a visual tool, they can be very helping for understanding why mortgage rates moved up, or down, or sideways over a period of time.

Like starting June 5 -- we can see that rates moved sharply higher because of inflation concerns, and specifically, Ben Bernanke's speech.

(Image courtesy: The Federal Reserve Bank of Cleveland)

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Dan Green is an active loan officer. Reach Dan via email at or call toll-free to 877-DAN-GREEN.