Yellen Signals Higher Rates May Come Sooner Than Expected

Newly installed Fed-chair Janet Yellen held her first press conference yesterday, and her remarks could portend big changes to mortgage rates and housing in the months ahead. Yellen suggested the Federal Reserve may begin raising interest rates as soon as next spring and said bond purchases would likely be wound down by this fall. Her comments were more hawkish than expected: interest rates rose as Yellen spoke, while stocks fell nearly 200 points before recovering some of their losses.

If the Fed follows Yellen’s script, mortgage rates in the U.S. will likely rise significantly this year and in 2015. That’s because an end to Fed stimulus means no more monthly purchases of mortgage-backed securities and treasury bonds by the central bank – purchases which have had the effect of lowering borrowing costs for homebuyers. It's pretty much a given that an end to Fed bond buying, coupled with outright increases in the Fed funds rate, could significantly boost mortgage rates in the coming months.

Yellen’s interest rate guidance in particular caught the market off guard. When asked by a reporter how to interpret Fed language that interest rates would remain in the current 0 to 25 basis point range for a "considerable time after the asset purchase program ends," Yellen said that "the language in the statement . . . probably means something on the order of six months."

It was an unusually explicit statement for a Fed-chair. Fed bosses usually cloak their answers in vague and opaque language, but Yellen gave an actual time-frame on when rate hikes can be expected. Of course, markets immediately reacted to the comment, with yields on the 10-year note rising from 2.70 to 2.77.

“She certainly moved (the timetable) up a little bit and I don't think the market was expecting that at all because she is widely viewed as being more on the dovish side of the aisle than she is on the hawkish side,” said Peter Kenny, CEO of Clearpool Group in New York.

Yellen’s hawkish note also extended to the labor market, which she said is healing faster than the Fed had forecast.

“The labor market more broadly I think has improved a little more than we might have expected,” she said.

While Yellen seems to be signalling a stronger economy ahead, her optimistic outlook could have a significant impact on mortgage borrowers in the coming months. If things are as good as Yellen and Co. seem to believe, and the Fed begins tightening early next year, interest rates on everything from 3/1 ARMs to the mighty 30-fixed will be heading higher – maybe much higher. For Americans looking to buy a house in the near-term, Yellen may have just given them one more reason to lock in a mortgage rate sooner rather than later.