With the Federal Open Market Committee scheduled to meet for two days beginning January 30, the Fed has entered "blackout mode" and no Fed speakers are slated for the next week. Combine Fed Silence with lack of economic data, and market are moving on emotion and gut feel.

That’s bad news for rate shoppers because there is a growing feeling among markets that the Fed’s previous 17 rate hikes may not have been enough to stop runaway growth and inflation.

It will be fairly quiet today, but as we look ahead to tomorrow’s Existing Home Sales, traders almost want to see higher-than-expected results because it would reinforce their pre-existing notions that the housing market is strong. That will push mortgage rates higher immediately.

If the numbers are in-line or even lower, however, don’t expect the opposite reaction; mortgage rates will hold flat because traders will instead shift their attention to Friday’s housing data, looking for validation that their opinions of housing are correct.

Adding complexity to the home financing process, The Tax Relief and Health Care Act of 2006 includes new tax code for homeowners. The act grants itemized deductions for private mortgage insurance (PMI) and government mortgage insurance (MIP) expense premiums paid in 2007.

For all loans originated in the 2007 calendar year, mortgage insurance is tax-deductible provided that two tests are met:

1. The homeowner’s household income is $100,000 or less in 2007
2. The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000

So, if a single person earns $90,000 in 2007 and buys a home using MI, the MI expenses are tax-deductible in 2007. However, there’s an catch! Because the new tax code is due to expire December 31, 2007, there is no guarantee that the MI will be tax-deductible in 2008.

Until the tax code changed and before Prime Rate reached 5.25%, MI was a relatively expensive option versus using a second mortgage to help finance a home. Now, the playing field is somewhat leveled for comparison purposes. There are plenty of examples in which MI is a more cost-effective route than a home equity loan and the opposite is true, too.

A full analysis should be performed to determine which course of action is best for you, especially considering the "temporary" status of the tax break.

Today’s University of Michigan Consumer Sentiment survey showed that Americans are feeling terrific about the state of the economy. The index jumped to 98.0 in January from last month’s 91.7 level.

On a broader level, this is not an important piece of data for mortgage markets. The idea is that a more confident consumer will spend more money on goods and services and that will propel the economy forward. However, there is a no direct connection between how a person feels about the economy, and how they spend their own money. We only need to look at our own lives to figure that piece out.

More likely to roil markets today are speeches from Fed Presidents Lacker (Richmond) and Hoenig (Kansas City). With traders already on edge, they’ll be looking for Fed insight on inflation.

Housing Starts handily beat economists’ expectations this morning and CPI showed strength, too, sustaining the market momentum that has trended mortgage rates higher over the last 30 days.

The Federal Open Market Committee has repeatedly told us that it expects the economy to slow down in 2007, led by a weakening housing market. And yet, housing refuses to die. The unexpectedly high number of homes that broke ground and building permits that were issued in December is giving markets something to think about.

Is the worst of the housing slump over, or did unseasonably warm weather stoke the figures? Nobody seems to be sure just yet. After opening down on the day, mortgage markets have recovered to flat.