Fed Chairman Bernanke Expects Mortgage Rates to Rise Before Employment Recovers

At a dinner hosted by the Woodrow Wilson International Center for Scholars, the Fed Chair reportedly told journalist Sam Donaldson that he believes that the economic recover underway will continue slowly (no "double dip recession) but that rates will rise before the country achieves full employment. Full employment is defined as the state in which those who desire work at the going rate for their skills are able to find it.

<!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} a:link, span.MsoHyperlink {color:blue; text-decoration:underline; text-underline:single;} a:visited, span.MsoHyperlinkFollowed {color:purple; text-decoration:underline; text-underline:single;} p {margin-right:0in; mso-margin-top-alt:auto; mso-margin-bottom-alt:auto; margin-left:0in; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} -->If the Federal Reserve tightens monetary policy, mortgage rates will increase, all other factors being equal.?? Mortgage rates today are at their lowest point in 2010, and still extremely close to historical lows.?? Bernanke didn't claim to know exactly when this would happen, but acknowledged that the banking is still in bad shape and institutions are reluctant to provide credit.

Bernanke said that the economic recovery is ongoing, but that "the unemployment rate is still going to be high for a while, and that means that a lot of people are going to be under financial stress."

Thomas Hoenig, President of the Kansas City Federal Reserve, indicated that he thinks a 1% rate increase by the end of the year is desirable.?? Eric Rosengren of the Boston Federal Reserve said rates cannot remain this low when the economy achieves full employment or inflation will become a danger.

Many economists predict that unemployment, currently at 9.7%, won't get below 9% by the end of the year. And while no one at the FOMC was willing to predict the point where it would be appropriate to raise rates, inflationary concerns will obviously drive that decision.?? Data today seems to show that inflation is under control for now.

Fed publicity seems to be preparing the public to accept the possibility of a rate hike soon.?? The next two meetings of the FOMC occur on June 22-23 and August 10. Investors will be carefully watching economic indicators before then and placing their bets, trying to predict the Fed's movements before it makes them. Mortgage borrowers should pay attention as well.