Fed Minutes Surprise Investors

Over the past week, comments from Fed officials and hawkish Fed minutes caused investors to increase their expectations for rate hikes this year. Along with stronger-than-expected economic data, this caused mortgage rates to end the week higher.

For most of this year, investors had very low expectations for federal funds rate hikes during 2016. Recent comments from Fed officials and Wednesday’s release of the minutes from the April 27 Fed meeting changed investor expectations. The minutes were far more hawkish than expected, which caused investors to shorten their timeline for rate hikes. One month ago, the futures market indicated that investors priced in zero chance of a rate hike at the June 15 Fed meeting. Now investors are pricing in a 30% chance. Investors currently view tighter Fed policy as negative for bonds, and mortgage rates moved higher on the changed expectations.

Continued improvement in the housing market was cited by Fed officials as one of the reasons that tighter monetary policy may be necessary. The recent housing data supported this. Existing home sales in April rose for the second straight month and were 6% higher than a year ago. This data measures contracts signed during the month. Since sales of existing homes make up 90% of all home sales, this report is a significant indicator. In addition, inventories of homes available for sale jumped 9% from March, easing one of the constraints holding back sales activity during the first few months of 2016.

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