Central Bankers Address Inflation

Recent comments from central bankers in the U.S. and Japan were positive for mortgage rates. The major economic reports released over the past week also were favorable, and mortgage rates ended the week lower.

Wednesday’s Fed statement and Friday’s announcement from the Bank of Japan (BOJ) contained similar comments about inflation. In short, inflation levels around the world are not increasing as quickly as expected by central bankers. Since mortgage rates are influenced by the outlook for future inflation, this was good news.

The policy implications of lower inflation were different for the two central banks. In the U.S., the Fed made no change in the federal funds rate or in its reinvestment policy for its Treasury and MBS holdings. The Fed statement did cause investors to reduce the number of rate hikes they expect the Fed to make in 2016. In Japan, the BOJ surprised investors by cutting short-term rates to try to boost economic growth and inflation. The BOJ made no change to its large bond-buying program, but BOJ officials said that they were open to expanding the program in the future if necessary. The BOJ announcement was favorable for U.S. stocks and mortgage rates.

Recent U.S. economic data contained few signs of upward pressure on inflation. Fourth-quarter gross domestic product (GDP) increased just 0.7%, down from 2% during the third quarter. For the entire year, GDP rose 2.4%, matching 2014 levels. Durable orders in December declined 5% from November.

Source: MBS Quoteline

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