Posts Tagged → Fed Funds Rate
Monday Mania!
This Week; is Holy Week. Trade likely will be quiet with the religious holiday. Most all of the data points this week are centered on the housing sector; starts and permits for Mar, new and existing home sales, the NAHB housing market index Monday and the FHFA housing price index on Thursday. The only other releases are weekly claims on Thursday and the and the April Philadelphia Fed business index also on Friday. That’s it for the week. Markets closed on Friday.
Until a week ago the overwhelming consensus in the markets was that the US economy would have a strong Q1 and optimism for the rest of the year was being touted as continued improvement. Over the past week investors were beginning to re-think the economic outlook and lowering expectations. It started with the IMF saying it is revising lower GDP Q1 growth from 2.0% to 1.5%; markets had accepted growth in Q1 at +3.0%. The Fed’s Beige Book out last week, while remaining optimistic, showed indications that growth isn’t as powerful as markets were thinking. The National Federation of Independent Business overall index fell in April, taking the optimism that had improved since last Oct totally away. Small businesses account for the majority of jobs. This is also earnings season with companies reporting Q1; so far earnings have been a little disappointing.
Consumer spending declining, until recently, have been ignored by investors. Even with gasoline and food prices increasing markets generally didn’t pay much attention—-until last week. $4.00+ gasoline and rapidly increasing food prices will, as we have continued to mention, slow consumer spending. Bernanke out there saying the increase in energy and commodity prices are “transitory” may not be; markets beginning to understand that. With consumer spending less than expected and the housing markets still showing no signs of stabilizing, let alone improving, investors are getting a little nervous.
And as of this AM:
Treasuries and mortgage markets opened better this morning on weaker stock indexes pointing to a weak open at 9:30. Trading this week will be on low volume with Passover and Holy Week. Already this morning there has been an increase in volatility; the 10 yr note traded +10/32 at 9:00 then fell to -5/32 and immediately bounced back to unchanged; mortgage prices at 8:59 this morning +5/32, at 9:07 -1/32, at 9:15 -4/32 (.12 bp). This week will likely be somewhat volatile but by the end of the week not much changed; many investors and traders will be leaving by mid-week.
S&P roiled markets early this morning; saying it has downgraded US debt to negative. The DJIA opened -170 points at 9:30, the bond and mortgage markets were quite volatile as investors were somewhat shocked on the announcement. Treasuries erased an earlier advance, the dollar pared gains versus the euro and gold rallied. S&P affirmed reduced the long-term U.S. debt rating to negative from stable, while affirming its AAA long-term and A-1+ short-term sovereign credit ratings. S&P said that more than two years after the beginning of the recent crisis, U.S. policymakers have not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures. While a shock, it shouldn’t have been with our politicians in Washington twinking around with budget cuts that were nothing; they patted themselves on their collective backs and announced a $38B cut in spending, but the actual real cut amounted to just $318 mil. All of the cuts were just not funding what had been approved previously. As long as our “leaders” are unwilling to make serious steps to cut spending and increase revenues (taxes) the US debt rating will continue to be down-graded, and US interest rates will increase.
Listening and watching the reaction from guests on CNBC one would think markets were slapped in the face with the down-grade and are taking offense. We and others have warned for over two years that US debt ratings were going to be lowered. Somehow most in the US believe the US is immune to debt ratings declines; time to wake up folks, the US if corporate accounting were to be applied, is bankrupt. 50% of all Americans pay no federal income tax while politicians don’t have the stones to do what everyone knows has to be done. We do not have leaders, we have politicians that above all want to keep their jobs.
This week has little data except for the housing sector; March starts and permits, March existing home sales as well as this morning’s NAHB housing market index and Thursday’s FHFA housing price index. The only non-housing data comes on Thursday with weekly jobless claims and the April Philadelphia Fed business index. The markets will close early on Thursday and be closed Friday for Good Friday.
This Week’s Economic Calendar:
Today;
10:00 am April NAHB housing market index (17 was expected, as reported 16)
Tuesday;
8:30 am March housing starts and permits (starts +7.8%; permits +3.9%)
Wednesday;
7:00 am MBA weekly mortgage applications
10:00 am March existing home sales (+2.5%)
Thursday;
8:30 am weekly jobless claims (-22K back to 390K; con’t claims 3.650 mil frm 3.680 mil)
10:00 am April Philadelphia Fed business index (32.9 frm 43.4 in March)
Mar leading economic indicators (+0.2%)
FHFA Feb housing price index (N/A)
Friday;
Markets closed
Fed speak; at 12:30 Dallas Fed’s Fisher speaking on the economic outlook. Likely he will continue the Fed’s outlook, moderate growth with no inflation concerns but that the Fed will continue to monitor events closely. The Fed will complete the $600B QE 2 by the end of June. His comments won’t likely present anything new.
TGIF!!
The bond and mortgage markets continue to swing back and forth within a narrow range, yesterday the 10 yr note rate increased 4 basis points, this morning at 8:45 its yield down 4 bp. Mortgage prices fell yesterday 7/32 (.22 bp), this morning the price up 10/32 (.31 bp) at 8:45.
At 8:30 March consumer price index increased 0.5% in line with estimates, the core (ex food and energy) up 0.1% slightly less than 0.2% expected. Yr/yr overall CPI +2.7%, the core yr/yr +1.2%. Inflation concerns still the great debate with the Fed saying don’t worry be happy while markets are worrying and are not happy. Who wins? The Fed isn’t concerned that inflation in commodity prices will pass through to consumer prices, markets don’t like fading the Fed on such a key issue but evidence is increasing that businesses are beginning to pass price increases down the chain. Not yet a major issue but one that bears watching. Bernanke’s key word “transitory” describing inflation of commodity prices is keeping rates from moving higher but equally keeping rates from declining.
There is so much focus on inflation with global inflation increasing in Europe, China, India, Brazil, Russia and emerging markets that markets completely ignored the NY Empire State manufacturing data also out at 8:30 this morning. Normally the NY report gets attention even though it is a a small regional series, this morning it was as if it didn’t exist. The overall index was expected to have declined to 15.0 frm 17.5 in March, as reported it jumped to 21.7. The sub-components also stronger; new orders index 22.34 frm 5.81, prices pd 57.69 frm 53.25 and employment at 23.08 frm 9.09. On another day those improvements would have pressured rates and improved stock indexes; today there was no interest in it.
While we hold our outlook that interest rates will slowly rise by the end of the yr, the near term is looking a little better; that said as long as the 10 yr continues to be comfortable in its near term narrow 10 bp range (3.40% to 3.50%) showing no tipping of the balance; mortgage rates also stuck in their ranges and will remain there until the 10 yr breaks in either direction.
Holding rates steady is the increasing realization that Q1 economic growth will be far less than what markets were believing just two weeks ago. More economists and some Fed officials are cutting Q1 GDP estimates to 2.0% growth from 3.55 to 4.0% that had been prevalent. Looks more and more like the unfettered optimism that was the consensus just a week ago has now been rattled especially when we have Fed district Presidents out there down-playing economic growth; a key reason that inflation concerns may be waning. The Fed’s Plosser (Philly Fed) out this morning saying he isn’t worried about inflation for at least another year; likely he sees economic weakness coming—–we agree but with rates increasing globally the US won’t be able to easily fund the deficits at low rates.
At 9:15 March industrial production was expected up 0.5%, it increased 0.8% and factory utilization increased to 77.4% (the highest since August 2008) frm 76.9% in Feb. Both stronger than thought but there was no reaction to the data in the bond and mortgage markets. The stock indexes however have improved; early on the indexes were lower, at 9:20 the DJIA up 10 points and the S&P about unchanged (+1.5 points).
At 9:30 the DJIA opened +26, the 10 yr +19/32 at 3.43% -6 bp and mortgage prices +14/32 (.44 bp).
The final data point today; at 9:55 the U. of Michigan consumer sentiment index, expected at 66.0 frm 67.5, was 69.6, the current conditions index 82.7 frm 82.5, 12 month out expectations 75 frm 60; the 12 month inflation index was unchanged at 4.6. The rate markets got a minor boost on the data, so too the stock market—–a little for everyone in the data.
A couple of Fed speakers today; at 10:00 Alt Fed’s Evans, at 1:30 KC Fed Pres Hoenig, Hoenig is the Fed’s maverick wanting no QE and the Fed to begin thinking about tightening.
Listening and watching analysts, economists and politicians the take away is at the end of the day uncertainty is how most end their various forecasts. Not unusual to couch forecasts but recently the couching has taken on a higher level. Economic growth but at what pace? China, India, Russia, Germany, and emerging markets expanding at rapid rates; the US dragging along with more now revising growth lower than what had been though a couple of weeks ago. The bond and mortgage markets holding steady with little changes in interest rates over the past three weeks; we will continue our conservative approach to trading as long as our favorite 10 yr note sticks in its 10 bp range—no long positions, no shorting either—-sometimes its better to just watch.
Wednesday’s Wash
Treasuries and mortgage markets rallied yesterday on weaker equity markets and Japan raising the disaster index to 7 on the nuke problems. This morning stock indexes, as they seem to do on any declines, are better pushing rate markets higher in yield. Yesterday the 10 yr note rallied nicely taking its yield down 8 bp to 3.50% where we noted resistance would occur, mortgage rates fell about 5 bp. Yesterday gold decline and crude oil fell $4.00, this morning in early trading gold up recovering all of the decline yesterday, crude up about $1.00 at 9:00. At 9:00 the DJIA +84 in pre-market trading after declining 117 points yesterday.
At 8:30 this morning March retail sales were generally in line with forecasts; up 0.4% overall and ex auto sales +0.8%. March sales were the weakest since June 2010; Feb sales revised to +1.1% from +0.7% ex auto sales. Excluding gasoline sales in March sales were up just 0.1%, in Feb ex gas up 1.1%. The rapid increase in gasoline prices as we have noted will cause a decline in consumer spending on discretionary items.
At 9:30 the DJIA opened +64, the 10 yr -11/32 at 3.54% +4 bp and mortgage prices -.18 bp frm yesterday’s close.
At 10:00 Feb business inventories, expected +0.8%, increased 0.5%; sales were +0.2% the lowest since June 2010, the inventory to sales ratio 1.24 months unchanged from Jan.
Earlier this morning at 7:00 am the weekly MBA mortgage applications for last week. Mortgage applications decreased 6.7% from one week earlier, weekly mortgage applications survey for the week ending April 8, 2011. The Refinance Index decreased 7.7% to its lowest level since February 11, 2011. The seasonally adjusted Purchase Index decreased 4.7% from one week earlier. The Purchase Index decreased 4.1% compared with the previous week and was 11.4% lower than the same week one year ago.
The four week moving average for the seasonally adjusted Market Index is down 3.3%. The four week moving average is up 0.7% for the seasonally adjusted Purchase Index, while this average is down 5.3% for the Refinance Index. The refinance share of mortgage activity decreased to 60.3% of total applications from 61.2% the previous week. This is the lowest refinance share since May 7, 2010. The adjustable-rate mortgage (ARM) share of activity decreased to 5.9% from 6.1% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased for the fourth consecutive week to 4.98% from 4.93%, with points increasing to 0.93 from 0.69 (including the origination fee) for 80% loans. This is the highest average contract rate reported since February 18, 2011. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.17% from 4.14%, with points increasing to 1.22 from 1.09 (including the origination fee) for 80% loans. The effective rate also increased from last week.
At 1:00 this afternoon Treasury will auction $21B of 10 yr notes; yesterday’s $32B of 3 yr notes went OK, like the Three Bears—not to hot, not too cool, just right. Today’s 10 yr should be decently bid but recent Treasury borrowing over the past few months has been a mixed bag, some auctions well-bid while others not so strong.
At 1:30 the President is going to lay out his sketchy ideas for cutting the budget deficit. Likely he will not want to cut entitlements, the path for Democrats to regain power. The budget battles are going to be contentious between Republicans and Democrats and will carry on through most of the summer. Regardless of how the cuts come and whether tax revenue increases occur, the end of it all will be another serious political miss. Our politicians are all about themselves and being re-elected; we do not expect a budget that will be meaningful until we have another election when our elected officials get the temperatures of the country—-again.
The Progressive Change Campaign Committee is calling for a “donor strike” by 2008 supporters of Obama if he puts Medicare and Medicare “on the table for potential cuts.” Obama is expected to discuss those programs during his speech this afternoon on ways to reduce the federal debt. Conservative Republicans, meanwhile, are already criticizing Obama’s planned speech for proposals to eliminate tax loopholes, and end George W. Bush-era tax cuts for wealthy Americans. It is going to be a real Cluster…
And finally today; at 2:00 the Fed will release its Beige Book on the economy from the 12 Fed districts.
With the Pres speaking at 1:30 and the Fed’s Beige Book at 2:00 the financial markets will likely not move much this morning. The bond and mortgage markets are technically bearish but as we have noted we are not expecting a spike higher in rates, rates will increase through the rest of the year as long as the economic outlook continues to be positive. That said, the IMF lowered their estimates for growth in the US from 2.0% to 1.5% this year, and lowered growth rates for Europe and Asian economies. The lowered forecasts have opened the door for those that are not so optimistic. A change in the outlook would of course support the rate markets as investors exit equities, that however, at least at this time, isn’t the consensus.
Tuesday Trivia
Treasuries and mortgages opened a little better this morning taking the 10 yr treasury down to 3.40% its near term resistance; the stock market indexes in pre-market trade were showing a lower opening. Mortgage prices up slightly at 9:00 about where they were at 9:30 yesterday; but by 9:15 mortgage prices were declining along with the 10 yr which once again failed at 3.40%. 9:15 30 yr mtg price -3/32 (.09 bp), the 10 -4.32 3.44% +1 bp. At 9:30 the DJIA opened -25, the 10 yr -5/32 and mortgage prices -5/32 (.15 bp).
Last night in a speech in Atlanta (Stone Mountain) Bernanke said that the recent rise in commodity prices will likely be “transitory” and prices will fall back. He went on to say though that the Fed must be watched “extremely closely,” encouraging bets that interest rates may be raised sooner than previously expected. The remark that commodity prices and energy prices will back down is somewhat surprising although he couched it with the famous comment that the Fed will watch and react accordingly if inflation creeps into end prices. Bernanke’s comments echoed his March 1 statement to lawmakers that Fed officials were “prepared to respond as necessary” to inflationary pressures. The Federal Open Market Committee, said following its March 15 meeting that it “will pay close attention” to the evolution of inflation and inflation expectations.
Bernanke’s comments in his speech shows the increasing division within the Fed about how long to continue keeping the FF rate at zero to +0.25% as it has since 2008; for the last couple of weeks one after another Fed officials have increasingly warned the US should end its tightening and begin to increase rates soon. Bernanke saying present inflation pressures in commodities and energy prices being “transitory” is his apparent response to the increasing concerns within the Fed. Bernanke remains convinced the economic recovery is not yet on solid ground, remarks like he made last night may be his way of jaw-boning the bond market from sending prices lower and yields higher. We don’t rally have to say it but, if rates increase even a little the depressed housing sector will be further constrained. Will the markets buy Bernanke’s “transitory” view about inflation? Back in the day he also said the sub prime mortgage markets were likely to be contained and managed. Is the US immune to inflation? Brazil, Russia, China, India, likely the European Union on Thursday and emerging market countries all increasing rates. Answer: No.
China increased its interest rates last night by 0.25% for the fourth time since the global financial crisis to limit the risk of asset price bubbles in the world’s fastest-growing major economy. The one-year lending rate will increase to 6.31% from 6.06% effective tomorrow. The one-year deposit rate will rise to 3.25% from 3.0%. On Thursday the ECB is widely expected to increase its base rate to head off inflation in the region which is now at +2.6% and higher than its 2.0% target rate on inflation.
Crude oil is lower today after reaching 30 month highs; with China increasing interest rates and oil supplies seen as increasing oil is a little lower today. That said, it is highly unlikely the demand for oil will decline regardless of increasing rates and China trying to slow its economy. Oil supplies won’t likely increase enough to offset the coming summer driving season and the Mideast oil world is far from stable.
The only economic report today; at 10:00 the March ISM services sector index expected at 59.5 frm 59.7. As released the index fell to 57.3; the new orders component 64.1 frm 64.4, prices pd at 72.1 frm 73.3 and employment at 53.7 frm 55.6. The repot not as good as was expected, the reaction is support the bond market and adding additional selling in equity indexes.
Two Fedsters out today: Kocherlakota of Minneapolis and Plosser of Philadelphia; (12;45 for Kocherlakota and 1:30 for Plosser)
Later today at 2:00 the minutes from the March 15th FOMC meeting will be released. Possibly a little more detail on the debate over QE and inflation expectations.
Once again the bellwether 10 yr, driver for mortgage rates, failed on its attempt to move below 3.40% this morning. The 10 has recently found a home trading between 3.40% and 3.50%, not much of a range but keeping mortgage rates stable. We remain bearish for the direction of interest rates on the wider perspective. For all of Bernanke’s confidence inflation won’t get a toehold, the Fed will end QE and the FF rate will likely be increased before the end of the 3rd Q.
Monday Minutia – Happy 2011!
This Week; its back to work with a full compliment of investors and traders after two weeks of very low trading volume. The year ended on Friday with an unexpected strong rally in the bond and mortgage markets, the 10 yr note yield fell 9 basis points and mortgage prices increased by .69 basis points; we believe it more short-covering than anything substantial, but we will take every improvement the market provides.
This week there is no Treasury borrowing, there is data everyday ending with the Dec employment report on Friday. The FOMC will release the minutes from the Dec 15th FOMC meeting on Tuesday, should get a lot of attention as always. 2010 ended with the increasingly strong belief that 2011 economic growth will increase, sending the equity market to one of the best years in many years. The situation in Washington will change dramatically with Republicans now in control of the House and more strength in the Senate. One of the first things Republicans want to do is work on Obamacare, making what most believe are necessary changes, the issue is what changes will everyone agree are the right ones.
January and February markets will continue to wrestle over the outlook for the economy; it will likely take into Feb to get a handle on consumer spending. Wall Street for the most part is expecting consumers to increase spending, we don’t believe that will be the case however. Consumers will more likely save than spend, the demographic changes with 10K baby boomers a day turning 65, a trend that will continue for the next 10+ years and spending by the huge population of boomers won’t meet the expectations currently out there. We believe 2011 will disappoint, consumers are more savvy than all those that work east of the Hudson River. Housing is still in dire shape and will continue all through 2011. Inflation fears are probably overdone but still will weigh on the bond and mortgage markets. Monday the 10 yr note yield opens at crucial technical levels, more improvement will change the near term outlook from bearish on rates to one of neutrality. We suggest potential home buyers take advantage of the opportunity if rates improve early this year; it is very unlikely longer term rates will decline much and more likely to increase as the year progresses.
Monday Minutia
Mortgage markets worsened last week in back-and-forth trading, pushing conforming mortgage rates higher on the week.
Despite the uptick, however, Freddie Mac reports that rates in still managed to make new, all-time lows for the third week in a row. The benchmark 30-year fixed rate mortgage is now down 1.02% since April 2010.
The United States is experiencing a Refi Boom.
As compared to 6 months ago, a new, $200,000 home loan costs $124 less per month in principal + interest.
This week, monthly payments may fall some more. It all depends on data.
Early in the week, housing data takes center stage. The National Association of Home Builders releases its Housing Market Index this morning, and, Tuesday, the government prints September’s Housing Starts figures. Both reports figure to influence the bond market.
Strong readings should lead mortgage rates higher; weak ones should lead them lower. Economists expect weakness.
That said, the biggest story of the week — and the one with the best chance of changing rates — could stem from the Federal Reserve.
Federal Reserve officials, including Chairman Ben Bernanke, have observed the recent U.S. economy and have openly discussed the use of “non-conventional means” to spur it forward. As the rhetoric increases, it’s widely believed that the Fed will act soon, and that the central bank’s plan will include new commitments to U.S. Treasury debt, and, possibly, to mortgage-backed bonds. For more information on Ben’s stance you can follow this link for a detailed article.
Speculation of the Fed’s next move has sparked mortgage bond demand which, in turn, has helped drive down mortgage rates. An official Fed announcement could push rates lower still.
For now, though, mortgage rates are as low as they’ve been in history. Rate shoppers have two choices. (1) Lock in a today’s low rates, or (2) Wait and hope that rates fall further. Ultimately, rates may fall, but once they start rising, they’ll likely rise quickly.
It’s a gamble you may not wish to take.
The Week That Was and What is to Come …….
Weak Employment data and increased expectations for Fed monetary easing were favorable for mortgage rates this week. Investors have priced in a high likelihood of additional Treasury security purchases by the Fed, which would increase demand for mortgage-backed securities (MBS). As a result, mortgage rates declined to a new record low..
While the private sector performed relatively well, Friday’s Employment data revealed net job losses and stagnant wage growth in September. Against a consensus forecast for a loss of 5K jobs, the economy lost 95K jobs. The weakness was seen mostly in the government sector, as state and local governments continued to shed jobs. The private sector actually added 64K, which was close to expectations. The Unemployment Rate remained at 9.6%. A broader measure, which also includes the underemployed, rose from 16.7% in August to 17.1%, matching the high reached in April. Average Hourly Earnings, a proxy for wage growth, was unchanged from August.
The Fed’s recent announcement that it may purchase additional Treasury securities (quantitative easing) to stimulate the economy has magnified the importance of economic news and increased daily volatility. Investors now evaluate each fresh piece of data in terms of its expected impact on Fed policy, and mortgage rates receive an extra benefit from weaker than expected data. In general, weaker economic growth leads to lower future inflation, which is favorable for mortgage rates. In addition, investors now expect higher levels of bond purchases by the Fed after weak data, and the increased demand also would be positive for mortgage rates. Of course, stronger than expected economic news will have the opposite effect and will push rates higher more quickly than usual.
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 Thursday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Friday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, the detailed FOMC Minutes from the September 21 Fed meeting will be released on Tuesday. Retail Sales, an important indicator of economic growth, will be released on Friday. Retail Sales account for about 70% of economic activity. Empire State, the Trade Balance, Import Prices, and Consumer Sentiment will round out the week. There will be Treasury auctions on Tuesday, Wednesday, and Thursday. Mortgage markets will be closed today, Monday for Columbus Day
Monday Minutia
Well it is another start to the week and the early AM read is putting some upward pressure on interest rates. On tap for the economic calendar this week is:
| August 16 | NY Empire State Manufacturing Index | ||
| August 16 | Net Long-term TIC Flows | ||
| August 16 | Total Net TIC Flows | ||
| August 16 | NAHB Housing Market Index | ||
| August 17 | Building Permits (MoM) | ||
| August 17 | Housing Starts (YoY) | ||
| August 17 | Producer Price Index (MoM) | ||
| August 17 | Producer Price Index (YoY) | ||
| August 17 | Producer Price Index ex Food & Energy (MoM) | ||
| August 17 | Producer Price Index ex Food & Energy (YoY) | ||
| August 17 | Capacity Utilization | ||
| August 17 | Industrial Production (MoM) | ||
| August 17 | ABC/Washington Post Consumer Confidence | ||
| August 18 | MBA Mortgage Applications | ||
| August 18 | EIA Crude Oil Stocks change | ||
| August 19 | Continuing Jobless Claims | ||
| August 19 | Initial Jobless Claims | ||
| August 19 | Leading Indicators (MoM) | ||
| August 19 | Philadelphia Fed Manufacturing Survey | ||
There is some dissent to the recent Fed Policy statement as one of the Fed President’s have broken ranks and is sharply critical of the continued lax monetary policy. I am not sure what he is smoking but Kansas City Fed President Thomas Hoenig feels the time to raise rates is now. While I do not claim to be an economic scholar but this recovery kind of feels like a car stuck in the mud. The tires are spinning but we aren’t getting anywhere. For more on Hoenig’s opinion follow this LINK for the full article.
A Simple Explanation Of The Federal Reserve Statement (March 16, 2010 Edition)
Today, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged, in its target range of 0.000-0.250 percent.
In its press release, the FOMC noted that the U.S. economy “has continued to strengthen” and that the jobs markets “is stabilizing”. It also said that business spending has “has risen significantly”.
This is a slight departure from the Fed’s January statement in which housing was not mentioned and business spending was said to be “picking up”.
It’s also the sixth straight statement from the FOMC in which the Fed described the economy with optimism. This is a signal to markets that 2008-2009 recession is over and that economic growth is returning.
The economy is not without threats, however, and the Fed identified several:
- High unemployment threatens consumer spending
- Housing starts are at a “depressed level”
- Consumer credit remains tight
The message’s overall tone, however, remained positive and inflation is within tolerance limits
Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period” and to end its $1.25 trillion commitment to the mortgage market by March 31, 2010. Fed insiders estimate that the bond-buying program lowered mortgage rates by 1 percent since its start.
Mortgage market reaction to the Fed press release is, in general, ambivalent. Mortgage rates are unchanged this afternoon.
The FOMC’s next scheduled meeting is a 2-day affair, April 27-28, 2010.
A Rate-Locking Strategy For Today’s Fed Meeting
The Federal Open Market Committee adjourns from a scheduled 1-day meeting today, its second of the year.
The FOMC has held the Fed Funds Rate in a target range of 0.000-0.250 percent since December 16, 2008, and the voting members of the Fed are expected to vote “no change” again today.
However, no change in the Fed Funds Rate doesn’t necessarily mean no change in mortgage rates. This is because the Fed Funds Rate is a different interest rate from the rates home buyers get from a loan officer.
- Fed Funds Rate : Short-term rate at which banks borrow from each other
- Mortgage Rate : Long-term rate of interest a homeowner pays on a mortgage
Mortgage rates are more responsive to what the Fed says as compared to what the Fed does.
After each FOMC meeting, Fed Chairman Ben Bernanke & Co issue a formal press release to the markets. At roughly 400 words, the statement is a brief commentary on the strengths, weaknesses, and threats for the U.S. economy.
Wall Street watches the statement with great interest and this is why mortgage rates are often volatile on the days of an FOMC adjournment. One mention of a word like “inflation” and traders rush to dump their mortgage bond positions.
Inflation is the enemy of mortgage rates.
After the Fed’s last meeting in January, it told us that the economy had “weakened further”, led by steep declines both in housing and employment. Global demand was off, too. The negative tone of the Fed’s statement caused mortgage rates to fall to near an all-time low.
This month, expect a less gloomy message.
Since January, there’s been a modest rebound in housing, employment appears more stable, and Retail Sales just posted huge gains. If the Fed alludes to improvement in any or all three, mortgage rates will likely reverse and zoom higher.
We can’t know what the Fed today will say so if you’re floating a mortgage rate and wondering whether to lock, the safe approach would be to do it today, prior to 2:15 PM ET.