Econonmic Outlook

After rising significantly over the last couple of weeks, mortgage rates moved higher again this week, but at a much slower pace. Strong demand for this week's large Treasury auctions helped keep mortgage rates relatively stable. At current yields, both foreign and domestic investors showed above average interest in adding bonds to their portfolios.

Behind the recent rise in mortgage rates has been an improved economic outlook and concerns about the enormous supply of new debt needed to pay for government programs. This leaves the Fed in a difficult position. Fed officials would like to keep mortgage rates low to lift the economy. To accomplish this, however, the Fed would have to significantly increase its purchases of mortgage-backed securities (MBS), requiring it to issue even more debt and adding to inflation concerns.

Most analysts believe that the Fed is unlikely to expand its MBS purchase program. At the June 24th meeting, they instead expect the Fed to discuss an eventual exit strategy for the program, which might include stretching out their time frame for purchasing MBS. Reducing the weekly purchases would allow the Fed to gradually scale back its involvement in the market. The MBS purchase program has helped bring mortgage rates down since it was announced in November, but the Fed cannot continue to intervene in MBS markets indefinitely. Slowly reducing their MBS purchases may be the best way to minimize the impact on the market as they make their exit.

Other Notable Facts:

• May Retail Sales showed small gains from April
• The Fed's Lacker expects a "bottoming-out process" in housing later this year
• Oil prices reached $73 per barrel, the highest level of the year
• The Fed purchased $23 billion in agency MBS during the week ending 6/10

Next Week:

The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of "intermediate" goods used by companies to produce finished products and will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Industrial Production and Housing Starts will be released on Tuesday. The Empire State and Philadelphia Fed regional manufacturing indexes will round out the schedule.