How The Fed Forced The Markets To Change Course

And the hits just keep on coming. 

The Fed's May meeting minutes showed that it is concerned about inflation and that is pushing mortgage rates higher once again today.

Despite "more favorable" economic readings, inflation remained "uncomfortably high" for the Fed and is following neither a downward trend, nor an upward trend. 

This makes it less likely that the Fed will lower the Fed Funds Rate rate in the near future.

The Fed's inflationary discomfort is forcing markets to change their expectations once again.  As we've discussed 56 times before, of course, the expectation in markets is more important than the news itself.

See, for the last 12 months, the experts keep calling for an economic slowdown.  Unfortunately, reviewing economic activity is a study of the past.  Making money off the markets is a prediction of the future.

You can see where the problem lies, right?  The best way for traders to make money in financial markets is to properly predict how some "thing" will perform over time. 

Their expectation drives their investment.

If the expectation is for inflation (the enemy of bonds), traders will dump their mortgage bond holdings and that forces mortgage rates higher.  It's not because inflation happened, it's because inflation is expected to happen.

Now that the Fed publicly stated its concern about inflation, expect data related to overall growth, cost of living and dollar-trading to move to center-stage.  Housing data will take a back seat (for now).

(Image Courtesy: Boss Radio)