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The graph above shows how the market's expectation of the Fed have changed since March.
So, moving from left-to-right, we can see how the markets gamble on the Fed Funds Rate.
On March 13, there was an equal probability -- 30 percent -- that August's Fed Funds Rate would be the same today (5.250%) as that it would drop to 5.000%.
As of last Wednesday, markets predict with 95% certainty that the rate will be remain unchanged with just a 2% chance that it will drop. Today's unexpectedly strong employment data should push that spread even wider.
Quick Primer: The Fed Does Not Control Mortgage Rates but it does swing a big stick in mortgage markets. The Fed tries to stem runaway inflation and inflation is the enemy of mortgage bonds.
So, when the Fed Funds Rate increases, it sends signals to mortgage bond markets and that is what move mortgage rates. Right now, the expectation of the FFR increasing is impacting markets more than the actual action itself (which hasn't happened, of course).
(Image Courtesy: Federal Reserve Bank of Cleveland)
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator call 513-443-2020.
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