Fed Talk
Yesterday afternoon’s speech by Fed Governor Lisa Cook generated a couple of headlines but no big surprises. In short, she stated she was ready to vote for an increase in key short-term interest rates if inflation does not retreat soon. There are two theories about the Fed raising rates to battle inflation. Initially, the bond market usually takes it as a negative because it signals the Fed is concerned about rising costs, which is the bond market’s number one nemesis. Rising inflation erodes the value of a bond’s future fixed interest payments, making them less appealing to investors. On the other hand, the Fed’s actions are intended to bring down inflation, eventually making bonds more attractive to investors. While we are seeing a negative reaction to current headlines about the Fed potentially raising rates, it is important to remember that their longer-term goals, if successful, will also lead to lower mortgage rates down the road.