by Calculated Risk on 8/08/2006 05:07:00 PM

For analysis of the Fed's decision to pause, see:

EDIT: FED changed to Fed.

Added: Bloomberg: Pimco's Bill Gross Says Fed Increases Over, Reduction Possible

Econbrowser: Econbrowser (and hopefully Bernanke) gets it right

EconomistView: The Fed Takes a Breather: Target Rate Unchanged at 5.25%

The Big Picture: The Dovish Pause

I'm sure I'll add more links, but I'd like to comment on the impact of the Fed's pause on mortgage rates. For thirty year mortgage rates, the Fed has no direct impact. The thirty year rates mostly follows above the yield of the ten and five year treasury notes:


Click on graph for larger image.

The Fed's pause could mean the economy is weakening, and the yield on the five and ten year notes would then probably fall, followed lower by rates on the thirty year mortgage. In fact, the ten year yield has been falling, and the thirty year rate (as reported by Freddie Mac) has fallen from 6.8% to 6.63% over the last two weeks.

Or, bond investors could revive the "Helicopter Ben" meme (too soft on inflation), and sell-off bonds, increasing the yield. This would then push rates on the thirty year mortgage higher.

Take your pick: both lower and higher fixed rates are possible.


The Fed's decision has a clearer impact on ARMs. Once again, the Fed does not directly impact the ARM rate, but the FED funds rate does set a lower bound for the One Year treasury indexed ARM.

According to Freddie Mac the One Year treasury-indexed ARMs averaged 5.69% last week. With the Fed pausing, the ARM rate will probably fall slightly over the next few weeks - depending on the expectations for future Fed rate hikes. Right now expectations are increasing for another pause in September.