Overview: The primary influences on mortgage rates over the past week were political events. Progress on the tax bill and a plea deal by President Trump’s former national security advisor Michael Flynn both caused large reactions, but they were roughly offsetting. Mortgage rates ended the week a little lower.
In recent weeks, signs of progress on tax reform have been viewed as negative for mortgage rates. This is because tax reform is expected to stimulate economic activity, which would raise the outlook for future inflation. Increasing expectations for the passage of the Senate tax bill were unfavorable for mortgage rates on Thursday and Friday, and the Senate voted in favor of its tax bill in the early hours of Saturday morning.
Also on Friday, it was reported that Michael Flynn would plead guilty to one charge and would cooperate fully with the special prosecutor. The resulting uncertainty about where the investigation will lead caused investors to shift from riskier assets, such as stocks, to safer assets, such as bonds, including mortgage-backed securities (MBS). The added demand for MBS was positive for mortgage rates, offsetting the effects of the progress on tax reform.
Despite recent strength in many indicators of economic activity, core inflation remains low. In October, the core Personal Consumption Expenditures (PCE) Price Index was just 1.4% higher than a year ago — the same annual rate seen in September. This is down from an annual rate of 1.9% in February.
Looking ahead, investors will be focused on political news. News on Flynn, tax reform, and government funding could continue to influence mortgage rates. To avoid a government shutdown on December 8, Congress must pass legislation to extend funding for the government. In addition, the important monthly Employment Report will be released on Friday. The next U.S. Fed meeting will take place on December 13. The Fed is expected to raise the federal funds rate by 25 basis points..