Jan 302017

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By G. Steven Bray

The normally dovish Fed head Yellen squashed dreams of lower interest rates a couple weeks ago when she said she thinks the economy is just peachy and she sees many more rate hikes in the next couple years. Bond traders headed for the exits, and interest rates shot up.

Her pronouncement reinforced the prevailing market sentiment that due to the Trump administration’s policies, economic growth and inflation are likely to exceed current expectations.

While that’s a reasonable conclusion, and it makes sense be cautious if you’ve not locked your mortgage rate, I don’t think the market is going to run away again like it did after the election. There still are so many unknowns concerning the new administration’s policies and how the world will react, in addition to the many other hurdles already facing the world economy.

The one economic measure that has my eye right now is inflation. While the Fed’s preferred measure, the core PCE index, remains benign, other measures are starting to tick up, and consumer expectations of inflation also are rising. Of course, those expectations could quickly reverse if oil prices start falling again.

The result of all this, I think, will continue to be market volatility. While market sentiment favors slightly higher rates, volatility would allow you to find a friendly dip to lock your rate.

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