Daily Commentary by Larry Baer

Daily Commentary

By Larry Baer, Market Alert

SHORT-TERM TREND (10 days or less). Favors higher rates and lower investor prices.

LONG-TERM TREND (11 days or more) Favors higher rates and lower investor prices.

Commentary: The Fed's zero-percent short-term interest rate policy has been a primary force behind the steady downward progression of mortgage interest rates since mid-year 2008.

Last week Thursday, during a dinner speech, Fed Chairman Bernanke said the central bank must continue to prop up the economy for an extended period -- but cannot do so indefinitely for fear of triggering a scary surge in inflation pressures. Bernanke is still talking about an extended period of low short-term interest rates but at the same time he is reminding market participants that the Fed is moving ever closer to the start of the tightening cycle. This is not a new wrinkle in his monetary policy thinking -- the Fed Chairman has fostered these ideas publically many times before.

Suddenly the big question mortgage investors are trying to frame an answer to is "how does the Fed define the word "closer"?

There are those who argue the Fed will begin pushing short-term interest rates higher as soon as the unemployment rate peaks at the end of this year or in the early part of 2010. A second group of analysts and market participants think a series of interest rate hikes from the Fed is a lot further off. They argue Fed Chairman Bernanke is an expert on the Great Depression - which means he clearly knows the economy slipped back into a disastrous recession in 1937-1938 primarily because the government started cutting back on emergency stimulus programs prematurely -- driven by the mistaken belief the worst of the economic catastrophe was over.

I believe both camps are probably right. A short-term interest rate tightening cycle from the Fed will not likely begin until the nation's employment picture brightens noticeably - and even then Bernanke and his fellow central bankers will probably choose to give the economy a "running start" before committing to an extended round of rate hikes intended to head-off the prospect of runaway inflation.

If my assessment proves accurate, it is highly likely Friday's big sell-off in the mortgage market will prove to be largely driven by market participants' overreaction to Bernanke's Thursday night comments. While it is almost certainly true mortgage interest rates will not move dramatically lower from current levels - it is equally true that mortgage interest rates are not likely poised to rocket dramatically higher - but will stagger higher over the balance of the year in modest incremental moves.

THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME