Market Analysis

The mortgage market is struggling to hold on to its trend to lower rates and higher prices. Yesterday during Congressional testimony Fed Chairman Bernanke hinted at a near term rise in core inflation and warned market participants not to loose respect for the Fed's commitment to control inflation. Those comments have tempered trader chatter about the prospects for a inter-meeting 25 basis-point fed fund rate cut from policymakers followed by an additional 50-basis point short-term rate cut on January 30th.

Fed Chairman Bernanke told members of the House Budget Committee that if the government plans to develop a fiscal stimulus package to boost economic growth - they need to get with it. Evidently, that is exactly what is going to happen. It appears that there is a bipartisan economic rescue plan taking shape as I write. Details remain vague but preliminary estimates suggest the package will total about $150 billion - part tax break for families and companies and part government spending programs designed to benefit low-income people. While there is always a chance this stimulus package could get bogged down by political bickering, most investors are currently assigning a high probability to the likelihood that a meaningful economic rescue plan will be hammered out well before the first-quarter of the year comes to an end.

As I mentioned in my commentary yesterday, the "so what" factor here is pretty straightforward from a mortgage interest rate perspective. Fixed-income investors (those that actually buy and hold bonds, notes and mortgage-backed securities) live in the future, not in the present. If and/or when a fiscal stimulus program is approved by Congress and signed by the President - the prospects for higher interest rates within the next 90 days of the announcement date will grow exponentially. Here's why. Fed rate cuts and government stimulus packages are specifically designed to sharply increase economic activity - which in turn sharply increases the demand for capital - which in turn ultimately pushes up both short- and long-term interest rates.