Next up for markets: Fed could set a hawkish tone

• The Fed is likely to reveal some detail about its plan to begin the unwind of its $4.5 trillion balance sheet when it releases minutes from its last meeting at 2 p.m.
• If the Fed seems confident that inflation will move higher, or shows it wants to tighten because of financial conditions, the market may take its message as "hawkish."
• A hawkish Fed, appearing ready to raise interest rates, could trigger a sell-off in stocks and in Treasurys, which would send bond yields higher.

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Joshua Roberts | Reuters

Federal Reserve Board Chairwoman Janet Yellen

The Federal Reserve could have an impact on trading when it releases the minutes from its last meeting Wednesday afternoon, particularly if it appears confident that it could raise interest rates again this year.

The Fed is also likely to provide some insight into its plan to unwind its $4.5 trillion balance sheet, which many market pros expect to begin in September. The Fed intends to taper back on its practice of replacing Treasurys and mortgages, as the issues it holds mature. Those securities were first purchased as part of the extraordinary easing it used to fight the financial crisis.

But traders were also focused on the fact that Fed speakers and even the European Central Bank have been sending somewhat hawkish messages recently, and the minutes could lean toward those comments.

"It almost seems like a concerted message from people at the Fed about financial conditions being very easy, perhaps too easy," said Stephen Stanley, chief economist at Amherst Pierpont. "It would be interesting to see if the committee discussed that and what the rhetoric was. …[Janet] Yellen, [Stanley] Fischer, [William] Dudley, each of them talked about financial conditions being easy one way or the other."

Stanley said Dudley, the New York Fed president, has made it clear if the Fed raises rates, and the markets react, it could slow its hiking. But if markets do not react at all, the Fed could increase its activity, he said.

The Fed minutes, to be released at 2 p.m. ET, are the first in a series of events that could reveal more about Fed policy for the second half of the year. On Friday, the June employment report will be released, and markets are watching the wages data to see if there are any early signs of returning inflation. Later Friday morning, the Fed will release its semi-annual monetary policy report at 11 a.m. ET, five days ahead of Fed chair Yellen's economic testimony before Congress. Then, the Federal Open Market Committee meets again on July 25 and 26, where it is not expected to take action on interest rates but could reveal more about its intentions.

The markets have doubted the Fed will hike rates for a third time this year, giving just about 50 percent odds for a September rate rise. Analysts are watching the minutes to see if the Fed signals that the recent dip in inflation is temporary and that it is on track to move ahead on interest rates unless the economy softens.

Bond market pros are also looking to see if the Fed will reveal any clues about when it will start tapering back its purchases of Treasury and mortgage securities.

The minutes are from the June 14 meeting when the FOMC raised rates for a second time this year and revealed details on how it intends to gradually begin paring back its balance sheet.

"Right now, many market participants don't expect a [rate hike] in September," said Kate Warne, investment strategist at Edward Jones. "Investors are thinking they won't move unless they get stronger inflation." She said the Fed could indicate it is willing to discount the downward move in inflation as short-term.

"If the minutes are more hawkish than expected, we would see investors surprised by the minutes. I don't think that's likely to be the case. Stocks would probably react negatively and interest rates would continue to rise," Warne said.

Stocks started out the month of July Monday on an upswing that sent the Dow to new highs, but selling in technology stocks pulled down the Nasdaq. On Wednesday, stocks opened slightly higher, after the July 4 holiday Tuesday. Treasury yields were also higher, and the dollar was firmer, ahead of the release of Fed minutes.

The yield on the 2-year note, the most sensitive to Fed hiking, was at 1.41 percent, after touching 1.426 percent Monday, its highest level since 2009.

"I think the expectations are for the Fed to confirm their tapering intentions," said Ian Lyngen, head of U.S. rates strategy at BMO.

"I think a September taper has become very consensus," said Lyngen. "If you see a uniform view reflected within the minutes, I think it's going to be bearish in the Treasury market because it suggests there will be follow-through with the tapering and hiking. If there's a divergence, it would be bullish."

Treasury yields move opposite prices, so a hawkish view would send rates higher.

"I don't really think they're going to change the overall tone or direction of the Treasury market," said Lyngen, adding he would expect the most action in the 5-year note as a reflection of future Fed policy moves. The 5-year yield was at 1.93 percent Wednesday. The 10-year was at 2.34 percent.

"I certainly don't think we'll get a rate hike in July, but I do think there's a chance we'll get the balance sheet announcement in July," said Lyngen. "You could make a case for September. My thought is they want to keep the balance sheet discussion separate as much as possible."

The Fed has said it would pause in its rate hiking when it begins action on its balance sheet. The balance sheet reduction is expected to put slight upward pressure on interest rates.

The Fed said it would cap its tapering back of purchases of Treasurys and mortgages at $10 billion a month, before increasing the cap at three-month intervals. The Fed is not adding to its balance sheet any longer, but it does replace securities it holds as they mature. It is that process that will be "tapered" back.

WATCH: On rates, I'm the most dovish on the committee right now: Fed's Bullard

On rates, I'm the most dovish on the committee right now: Fed's Bullard  Friday, 30 Jun 2017 | 1:12 AM ET | 03:02

Fed Raises Key Interest Rate For 4th Time Since 2015

Federal Reserve Chair Janet Yellen speaks to reporters in Washington, D.C., on Wednesday after the Fed announced it would increase interest rates by a quarter-point.

Susan Walsh/AP 

 

Updated at 3:55 p.m. ET.
Federal Reserve policymakers have raised their target for the benchmark federal funds interest rate by a quarter-point, to a range of 1 percent to 1.25 percent.
Despite the increase — the fourth since December 2015 — interest rates remain near historic lows, but the move will mean higher borrowing costs for consumers. The Fed previously raised rates in March, and on Wednesday, it signaled plans for one more rate increase this year.

In a statement Wednesday, the policymakers said that "the labor market has continued to strengthen and that economic activity has been rising moderately so far this year."
The economy grew at a rate of 1.2 percent in the first quarter of this year, about half as fast as it did in the final three months of 2016. Unemployment dipped to 4.3 percent in May, a 16-year low.
"Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined," the Fed statement said. "Household spending has picked up in recent months, and business fixed investment has continued to expand."

Greg McBride, an analyst with consumer financial site Bankrate.com, tells NPR's Yuki Noguchi that, taken together, the Fed's moves have caused home equity and car loan rates to increase about 1 percentage point over the last two years.
"The combination of rising debt burdens and rising interest rates is starting to strain some households, and we're seeing delinquencies pick up from recent lows," McBride says.
In the wake of the financial crisis, the central bank added Treasury securities and mortgage-backed securities to its balance sheet. Now it's making plans to reduce those holdings, which total more than $4 trillion.
The Fed said it "currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated."
As Reuters reports:

"The central bank said it would gradually ramp up the pace of its balance sheet reduction and anticipates the plan would feature halting reinvestments of ever-larger amounts of maturing securities.
"The Fed said the initial cap for Treasuries would be set at $6 billion per month initially and increase by $6 billion increments every three months over a 12-month period until it reached $30 billion per month in reductions to its holdings.
"For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month."

Robert Bobby Darvish Platinum Lending Solutions Newport Beach CA

Mortgage rates edge higher but remain within a narrow band

 

(Jason Reed/Reuters)

Mortgage rates wandered higher again this week after a brief slip but remain within a narrow band.
According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average ticked up to 4.05 percent with an average 0.5 point. (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 4.02 percent a week ago and 3.57 percent a year ago. The 30-year average has hovered between 4.02 percent and 4.05 percent the past three weeks.
“Mixed economic reports over the last few weeks have anchored the 30-year mortgage rate around the 4 percent mark,” Sean Becketti, Freddie Mac chief economist, said in a statement.

[New rules on student loans may make it easier for many to qualify for mortgages]

The 15-year fixed-rate average rose to 3.29 percent with an average 0.5 point. It was 3.27 percent a week ago and 2.81 percent a year ago. The five-year adjustable rate average increased to 3.14 percent with an average 0.5 point. It was 3.13 percent a week ago and 2.78 percent a year ago.
With the yield on the 10-year Treasury climbing to 2.42 percent Tuesday, its highest point since March 30, home loan rates — which tend to follow the movement of long-term bonds — were slowing moving higher. Then came the unexpected firing of FBI Director James B. Comey. Because this type of news makes investors anxious and causes them to seek safety in bonds, the yield on the 10-year U.S. bond slid to 2.41 percent Wednesday.
The retreat in long-term bond yields came too late in the week to be factored into Freddie Mac’s survey. The government-backed mortgage-backer aggregates rates weekly from 125 lenders from across the country to come up with a national home loan rate average.

[As equity rises, many homeowners use refinancings to free up cash]

Experts are mixed on where mortgage rates are headed. Rates had fallen in 6 of the past 7 weeks. Bankrate.com, which puts out a weekly mortgage rate trend index, found that about half of the experts it surveyed say rates will go up and another half say they will remain relatively stable in the coming week. Less than 10 percent say they will fall. Greg McBride, chief financial analyst for Bankrate.com, is one who expects rates to rise.
“The job market is tightening, inflation is moving up, and the Fed is poised to raise rates in June — all of which is providing some lift to mortgage rates,” McBride said.
Meanwhile, mortgage applications picked up last week, according to the latest data from the Mortgage Bankers Association. The market composite index — a measure of total loan application volume — increased 2.4 percent. The refinance index rose 3 percent, while the purchase index grew 2 percent to its highest level since October 2015.
The refinance share of mortgage activity accounted for 41.9 percent of all applications.

Robert Bobby Darvish platinum Lending Solutions of Orange County

Yellen: Fed will raise interest rates, let economy "coast"

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  Right: Federal Reserve Chair Janet Yellen Left: moderator Susan M. Collins, Sanford Weill Dean of Public Policy at the University of Michigan Gerald R. Ford School of Public Policy.

  Tyler Scott / Michigan Radio

Federal Reserve Chair Janet Yellen said at a University of Michigan event today the Fed plans to gradually raise short-term interest rates.
Yellen said the change in monetary policy comes after years of holding short-terms interest rates at low levels.
“I think we have a healthy economy now ... but it’s been a long time coming,” Yellen said.
Yellen said the current unemployment rate of 4.5% is “even a little bit below” what Yellen and her other colleagues at the Fed would consider “full employment.” She said inflation is “reasonably close” to the Fed’s stated goal of two percent.
She said the economy's current moderate level of growth is due in large part to increased consumer spending, but that the health of the housing market has improved, as well as investment spending and the global economy.
“Looking forward I think the economy is going to continue to grow at a moderate pace,” Yellen said.
Yellen, who assumed office in 2014, comes to the end of her term as Fed chair next year. She said the new monetary policy of the Fed, including raising interest rates, is focused on maintaining current levels of economic growth.
After the global financial crisis of the mid-2000s, the Fed did practically everything it could from a monetary policy perspective to increase consumer spending, including holding the “overnight” interest at nearly zero percent for years, according to Yellen.
But in those years, lowering short-term interest wasn’t enough. The Fed also bought treasury and mortgage-backed securities to lower long-term interest rates, according to Yellen. In addition, the Fed practiced what Yellen called “forward guidance,” reassuring the financial markets that interest rates would remain low.
“Before, we had our foot pressed down on the gas pedal trying to give the economy all the ‘oomph’ we possibly could,” Yellen said. “Now, [we want to be] allowing the economy to coast and remain on an even keel.”
Yellen also said it is important to begin rising interest rates before the economy “overheats."
“We don’t want to be in a position where we have to raise rates rapidly, which could conceivably cause another recession,” Yellen said. “We want to be ahead of the curve and not behind it.”

Why We Could Get Negative Interest Rates Even Though The Fed Is Hiking

Federal Reserve Board Chairman Janet Yellen speaks during a briefing on March 15, 2017 in Washington, DC. / AFP PHOTO / Brendan Smialowski/Getty Images

At its March meeting, the Federal Reserve raised interest rates by 0.25%. In doing so, it hiked rates for only the third time since 2006. However, in a strange turn of events, the Fed’s move was perceived as a dovish one by the markets.
That’s because even with inflation at its highest level since 2012, the Fed said monetary policy will remain accommodative “for some time.” As has been the case in the past, the Fed is willing to let inflation consolidate above its 2% target before embarking on a more aggressive tightening path.
This willingness to let inflation “run hot” means even as nominal rates rise, real rates—that is, the nominal interest rate minus inflation—are headed into negative territory.
So what are the implications of negative real rates?
Negative Real Rates Drive Gold Higher
The consumer price index (CPI), the most widely used measure of inflation, averaged 2.67% for the first two months of the year. Even if inflation averaged only 2% for all of 2017—the Fed’s target—it would be a big problem for investors and savers alike.
Today, a one-year bank CD pays about 1.4%. Therefore, anyone who keeps their money in a bank is watching their purchasing power erode.
Of course, there are other options. You can put your money in U.S. Treasuries or dividend-paying stocks—both popular sources of fixed income.
However, with both the 10-year Treasury yield and the average dividend yield for a company on the S&P 500 hovering around 2.35%, that doesn’t leave much in the way of real gains if inflation is running at 2% per annum.
If inflation rises or bond yields fall, real interest rates will be pushed into the red… and that’s very bullish for gold.
Gold is known as the yellow metal with no yield, but simple math tells us no yield is better than a negative one. Because of this, gold has done well when real rates are in negative territory. In fact, real US interest rates are a major determinate of which direction the price of gold moves in.
A study from the National Bureau of Economic Research found that from 1997–2012, the correlation between real U.S. interest rates and the gold price was -0.82.
This means as real rates rise, the price of gold falls and vice versa. A -1.0 reading would be a perfect negative correlation, so this is a tight relationship.

The Fed’s hesitation to raise rates faster is contributing to another trend that is also bullish for gold.
A Falling Dollar Equals Higher Gold Prices
In the six weeks following the US election, the dollar skyrocketed 5.6%—a huge move for a currency.
However, since the beginning of the year, the greenback has given back most of its post-election gains. This is in part due to the Fed’s “dovishness” on interest rates.
The strong negative correlation between gold and the U.S. dollar is a major reason the yellow metal is up over 9% year to date.

Market Realist

In the March edition of Bank of America Merrill Lynch’s Global Fund Manager Survey, respondents thought the dollar was at its most overvalued level since 2006. As the chart shows, the survey has a good track record of determining when the dollar is overvalued.

Bank of America Merrill Lynch

Tying it all together, what do these trends mean for gold?
Gold Should Go Higher from Here
With arguably the two biggest drivers of the gold price trending in the yellow metal’s favor, gold is likely to go higher. Although the dollar could rise if Washington implements some structural reform, real rates aren’t headed higher anytime soon based on the Fed’s actions.
Bank of America Merrill Lynch said these two trends were part of the reason why it upgraded its forecast for gold to $1,400 per oz. by year-end. As the chart below shows, the market turned bullish on gold following the Fed’s December rate hike.
In closing, after nine years of doing its utmost to generate inflation, the Fed has finally succeeded. If past is prologue, as inflation rises over the coming months, gold will do very well.
If you’re considering getting some gold before it goes up, do your homework first.

Robert Bobby Darvish Platinum Lending Solutions

Beware of mind games when shopping mortgage rates

(Photo: Getty Images/iStockphoto)

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Sometimes our brain gets in the way of a good decision. It’s called “cognitive bias,” and it happens when our mind tricks us into making irrational choices. We think something is true — and we just go with it.
Here’s how to keep your mind from messing with you when shopping for the best mortgage rate.

Raise the anchor

Maybe your ears perked up when you heard about 3.5% mortgage rates last summer. You started to think about buying a home or possibly refinancing. But now rates are closer to 4.5%.
In this case, the mind game at work is called “anchoring.” You just can’t get that 3.5% rate out of your head.

3 reasons why downsizing isn't just for empty-nesters

"Once you have that number in your mind, it's very hard for you to be flexible about proceeding with a financial decision," says Mary Gresham, a psychologist in Atlanta. “You might think, 'Well, I'll just wait until it goes back [down] to that.’"
But if rates keep moving higher, you might wish later that you had snagged that “high” 4.5% rate.

Don’t get hung up on framing

Another way our brain sometimes blocks our best interests is through “framing” — drawing varying conclusions from the same information when it’s presented differently.
"Percentages look small," says Dan Ariely, professor of psychology and behavioral economics at Duke University. "Imagine if instead, mortgages were framed not in terms of percentages but in terms of how much we're going to pay in interest over the life of the mortgage." This information is available to borrowers, but it's generally not how they comparison shop for a loan, Ariely says.

This company will double your down payment. What’s the catch?

The difference between a 4.75% and a 4.5% rate might not seem like big — but what if you considered total costs? You may be less willing to choose a product that charged $25,000 more in interest over the life of the loan and had $3,000 more in closing fees.

Slow and steady wins the rate

Avoiding irrational thinking requires knowing a bit about how your thought processes work.
"We have two brain systems that do our finances for us,” Gresham says. “One is what we call the fast, emotional system. And the other is the slow, rational system. Take your time and think it through. Don't make a quick decision about finances."

'A bad idea': More new mortgages are risky ones

As Ariely notes, "We decide on a mortgage too early without truly searching and without negotiating."
Consider the big picture and the big numbers. Shopping annual percentage rates (APRs) rather than just a lender’s published rates, and considering your total costs can help you choose the best mortgage.
And give your mind a little more time to work out the details.

Robert Bobby Darvish of Platinum Lending Solutions of Orange County

Mortgage rates move lower for Friday Feb 24 2017

Mortgage rates move lower for Friday

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Yuganov Konstantin/Shutterstock.com

Several key mortgage rates dropped today. The average rates on 30-year fixed and 15-year fixed mortgages both decreased. On the variable-mortgage side, the average rate on 5/1 adjustable-rate mortgages also fell.
Mortgage rates are in a constant state of flux, but, overall, they are very low by historical standards. If you're in the market for a mortgage, it may be a great time to lock in a rate. Just make sure you shop around first.
RATE SEARCH: Compare mortgage rates in your area now.

30-year fixed mortgages

The average rate you'll pay for a 30-year fixed mortgage is 3.97 percent, down 7 basis points
over the last week. A month ago, the average rate on a 30-year fixed mortgage was higher, at 4.09 percent.
At the current average rate, you'll pay a combined $475.69 per month in principal and interest for every $100,000 you borrow. That's a decline of $4.03 from last week.
You can use Bankrate's mortgage calculator to estimate your monthly payments and see how much you'll save by adding extra payments. It will also help you calculate how much interest you'll pay over the life of the loan.

15-year fixed mortgages

The average 15-year fixed-mortgage rate is 3.16 percent, down 2 basis points
over the last seven days.
Monthly payments on a 15-year fixed mortgage at that rate will cost around $698 per $100,000 borrowed. The bigger payment may be a little more difficult to find room for in your monthly budget than a 30-year mortgage payment would, but it comes with some big advantages: You'll come out several thousand dollars ahead over the life of the loan in total interest paid and build equity much more quickly.

5/1 ARMs

The average rate on a 5/1 ARM is 3.15 percent, falling 1 basis point from a week ago.
These types of loans are best for those who expect to sell or refinance before the first or second adjustment. Rates could be substantially higher when the loan first adjusts, and thereafter.
Monthly payments on a 5/1 ARM at 3.15 percent would cost about $430 for each $100,000 borrowed over the initial five years, but could increase by hundreds of dollars afterward, depending on the loan's terms.

Where rates are headed

To see where Bankrate's panel of experts expect rates to go from here, check out our Rate Trend Index.
RATE SEARCH: Want to see where rates are right now? See local mortgage rates.

Average mortgage rates

Product	Rate	Change	Last week
30-year fixed	3.97%	0.07	4.04%
15-year fixed	3.16%	0.02	3.18%
30-year fixed jumbo	4.46%	0.16	4.30%
30-year fixed refinance	3.99%	0.09	4.08%

Last updated: February 24, 2017.

Methodology: The rates you see above are Bankrate.com Site Averages. These calculations are run after the close of the previous business day and include rates and/or yields we have collected that day for a specific banking product. Bankrate.com site averages tend to be volatile -- they help consumers see the movement of rates day to day. The institutions included in the "Bankrate.com Site Average" tables will be different from one day to the next, depending on which institutions' rates we gather on a particular day for presentation on the site.
To learn more about the different rate averages Bankrate publishes, see "Understanding Bankrate's Rate Averages."

Bobby Robert Darvish Platinum Lending Solutions Orange County