Last week's big blockbuster news was the Jobs report.  Lackluster employment in July seems to have proved that chairman Bernanke was dead on when he indicated that the economy was indeed slowing.  The timing couldn't be any better with the next FOMC meeting this Tuesday.  Baring any unforeseen news it is likely that the Fed will pause the rate hikes they started over 2 years ago.  But be cautioned, mortgage rates are not directly linked to the Fed's action - So what direction will mortgage rates move?

Since the Fed controls short term rates, a pause by the Fed means that adjustable loans will benefit the most from their likely neutral stance on rates.  However, fixed rates might or might not see a benefit even though it is widely believed the Fed will pause raising rates on Tuesday.

Fixed rates are based on investors that trade Mortgage Backed Securities, it is these investors' perception of inflation that controls the direction of fixed rate mortgages.  These same investors will be more interested in the Fed's statement than the pause in rate increases.  If the Fed, in its statement, indicates that inflation is anything but under control fixed rates may in fact increase even though short term rates are held steady.  Although we believe this scenario remote, it is possible and has occurred several times in recent history.

The bottom line - In our opinion a neutral statement by the Fed in conjunction with a pause in rate hikes will likely stabilize or slightly improve the market,  Although unlikely, any indications that a pause will be temporary or not sustainable will likely result in higher rates.