MBS Day Ahead: Time to Find Out If The Fed Matters

FOMC Minutes today!  Time to find out if the Fed even matters or if markets have just been consolidating for their own reasons.  Granted, the Fed always matters, but the official policy communications (statement, minutes) definitely come and go in terms of impacting markets. 

With an imminent rate hike, it's easy to assume that every Fed communication is important right now--especially when the first legitimate opportunity for that rate hike will be at the next meeting.  Indeed, it's still very possible that today's Minutes produce a major reaction.  And bonds seem to be consolidating in anticipation of "something."

But we'd still need to ask ourselves: what can the Fed really offer that we haven't already heard?

We know they're close to hiking and we know they're more interested in hiking than the average mortgage rate watcher.  We know they forced the word "some" into the phrase describing how much more labor market improvement they need to see before raising rates, yet the longer end of the yield curve continued to rally (i.e. 10yr Treasuries and mortgage rates have improved while 2yr rates have risen).

In fact, the only reason that mortgage rates haven't fallen more is that the constant upward pressure from the shorter end of the yield curve.  Text books might tell you that longer term bond yields are a factor of economic growth potential and inflation, but that's only part of the story.  The other part is that creditors can afford to earn less interest on longer term rates when they pay less interest to borrow at shorter term rates.