Overview: Over the past week, mortgage rates reacted favorably to news regarding tax reform and the expected choice for the next Fed Chair. The economic data had little impact. As a result, mortgage rates ended lower.
Talk about potential candidates for the next Fed Chair overshadowed Wednesday's Fed meeting. Early last week, it was reported that the two leading contenders were Fed Governor Jerome Powell and Stanford economist John Taylor. Under Powell, it is expected that the Fed would maintain a course for monetary policy similar to the current one, while Taylor is viewed as favoring a more rapid increase in the federal funds rate. On Friday, it was reported that President Trump favors Powell. Since Powell's approach to monetary policy is expected to be more favorable, mortgage rates declined after the news. On Wednesday, the Fed held the federal funds rate steady, and the statement contained no significant changes. The meeting caused little market reaction.
In recent weeks, the government has made progress on tax reform. This has been negative for mortgage rates, since the tax cuts likely would be inflationary. On Monday, however, it was reported that a plan was under consideration that would phase in tax cuts over several years instead of being effective immediately. This caused mortgage rates to fall.
Tuesday's release revealed that consumer confidence jumped far more than expected, to the highest level since 2000. This is not surprising given current economic conditions. The labor market is strong, wage growth is accelerating, and the unemployment rate is at its lowest level in 16 years. The stock markets in the United States and many other countries are at record levels. In addition, hopes are high for a major tax cut package. Consumer spending accounts for roughly 70% of economic activity, so elevated confidence levels are good for the economy..
Looking ahead, the next couple of days will be packed with potentially market-moving events. On Thursday, President Trump is expected to announce his nominee for the position of Fed Chair, and the House is expected to reveal more details of its tax plan. The key Employment Report will be released on Friday.