Weekly Mortgage Update: 30yr Fixed 4.125%; 15yf Fixed 3.5% both w/ 1%Origination

In one of the most volatile weeks ever seen, important economic news came out every day and produced major reactions in financial markets. Investor uncertainty is extremely high, amplifying the price movements. As stock prices fluctuated wildly, so did mortgage rates, which reached new lows for the year.

Into this highly charged environment, a steady flow of significant economic news added fuel to the flames. It began late last Friday with the announcement that S&P downgraded the credit rating of US debt. Then the Fed shocked investors with its statement (see below). A scare ran through financial markets that European banks, particularly in France, were at risk of failing, but these fears abated quickly. Investors were comforted by very strong demand for the 3-year and 10-year Treasury auctions, and then were taken aback by extremely poor results for the 30-year auction. It is not surprising that many financial markets set volatility records this week.

The biggest surprise in Tuesday's FOMC statement was that the Fed currently anticipates that economic conditions will call for the fed funds rate to remain exceptionally low through at least the middle of 2013. This means that the Fed doesn't expect to raise rates for at least two more years. Three Fed officials voted against this change in language. The Fed also downgraded its forecast for economic growth, saying that it will be "considerably slower" than previously expected at the last FOMC meeting on June 22. Slower economic growth with few signs of higher inflation will make it more difficult for the labor market to recover, but it is a favorable environment for mortgage rates.

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 Wednesday.