U.S. Economy is Expanding

The Federal Reserve has released the minutes from its most recent Federal Open Market Committee meeting. The Fed Minutes are a detailed meeting recap; the companion piece to the more brief, more well-known press release.

As a comparison, the minutes of the last FOMC meeting contained 60 paragraphs and 7,027 words. The post-meeting press release was just 5 paragraphs and 382 words.

December’s Fed Minutes shows Fed members with a positive, cautious, take on the economy.

Recent data suggests that the U.S. economy is expanding, the Fed said, but “strains” in global financial markets pose “significant risks” to the downside. This tell us that the Fed believes its economy-stimulating programs are working, but that officials remained concerned by events in the Eurozone.

The U.S. economy could be impacted by fallout.

Other Meeting Topics Included:

• On growth : The economy is expanding, despite slowing in “global economic growth”
• On housing : Data suggests the “depressed” market “could be improving”
• On inflation : Prices are stable, and remain within tolerance levels

The Fed’s analysis was of little surprise to Wall Street, and going forward, Fed Chairman Ben Bernanke wants to keep it that way. The Fed Minutes contained a passage regarding market communication, and how the Fed will be more pro-active about it in the future.

With the release of its minutes, in a section called “Market Policy Communications”, the Federal Reserve showed its plans to release 4 times annually its economic forecasts, and plans for the Fed Funds Rate. This signals in a shift in Federal Reserve transparency.

The Federal Reserve will begin including the forecast in its economic projections beginning after its next policy meeting, January 24-25, 2012.

What is the FOMC?

The Federal Open Market Committee adjourns from a two-day, scheduled meeting today, the sixth of 8 scheduled meetings this year, and the seventh Fed meeting overall.

The FOMC is a designated, 12-person committee within the Federal Reserve, led by Fed Chairman Ben Bernanke. The FOMC is the voting members for the country’s monetary policy. Among its other responsibilities, the FOMC sets the Fed Funds Rate, the overnight rate at which banks borrow money from each other.

Note that the “Fed Funds Rate” is different from “mortgage rates”. Mortgage rates are not set by the Fed. Rather, they are based on the price of mortgage-backed bonds, a security traded among investors.

As the chart at top illustrates, the Fed Funds Rate and conforming mortgage rates in Ankeny have little correlation. Since 1990, the two benchmark rates have been separated by as much as 5.29 percent, and have been as close as 0.52 percent.

Today, the separation between the Fed Funds Rate and the national average for a standard, 30-year fixed rate mortgage is roughly 4 percent.

Rates Volatile Before & After the Meeting Adjourns

This spread will change, however, beginning 2:15 PM ET Wednesday. That’s when the FOMC adjourns from its meeting and releases its public statement to the markets.

There is no doubt that the Fed will leave the Fed Funds Rate in its current target range of 0.000-0.250%; Fed Chairman Bernanke plans to leave the benchmark rate as-is until at least mid-2013. However, the Fed is expected to add new support for markets.

Unfortunately, there are few clues about how the Fed will support markets, and there is no consensus opinion regarding the size of the said support. As a result, mortgage rates should be bouncy today. First, they’ll be volatile ahead of the Fed’s statement. Then, they’ll be volatile post-Fed statement.

Even if the Fed does nothing, mortgage rates will change. This is because Wall Street is prepping for an announcement and — no matter what the Fed says or does — investors will want to react accordingly.

When mortgage markets are volatile, the safest move is to lock your mortgage rate in. There too much risk to float.

What is the FOMC?

The Federal Open Market Committee (FOMC) holds a one-day meeting today, it’s 8th scheduled meeting of the year and 10th overall.

The FOMC is part of the Federal Reserve, the government group that sets U.S. monetary policy. The Fed’s primary policy-setting tool is an interest rate known as the Fed Funds Rate.  The Fed Funds Rate is the interest rate at which banks borrow money from each other.  Important note: The Fed Funds Rate (FFR) should not be confused with mortgage rates.

Two years ago on Thursday, the FOMC met and voted to lower the Fed Funds Rate to as close to zero percent as possible without actually going to zero percent; the benchmark rate was prescribed to a range of 0.000-0.250 percent.  That was with the goal of stimulating the weak economy.

This Meeting Determines Weather Rates Rise or Fall

The Fed Funds Rate had never been set so low before, but ever since, it’s been held to that range. It will likely be held where it is through early-2011.  With that said, it doesn’t mean that mortgage rates won’t change.

Because the Fed Funds Rate has been so low for so long, businesses and consumers have been able to borrow money on the cheap. As a result, both capital and household spending have been on the rise, which is good news for the economy.

The Fed is expected to acknowledge this sentiment today.  In turn, this should lead mortgage rates higher.

The Fed’s press release is the focus for the markets.  If there’s talk of higher-than-expected inflation or better-than-expected growth you should see mortgage rates move higher.  If there’s talk of a slowdown should lead rates lower.

If you still haven’t locked in your interest rate and you need some help, I’d be happy to help.  Feel free to email me or call me at the information on this page!

Fed Funds Rate Also Remains Unchanged

Tuesday, in its 7th meeting of the year, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged.

The Fed Funds Rate remains at a historical low, within a Fed’s target range of 0.000-0.250 percent.

In its press release, the FOMC said that the pace of economic recovery “has slowed” in recent months. Household spending is increasing but remains restrained by high levels of unemployment, falling home values, and restrictive credit.

For the second straight month, the Federal Reserve showed less economic optimism as compared to the prior year’s worth of FOMC statements dating back to June 2009. However, the Fed still expects growth to be “modest in the near-term”.

This outlook is consistent with recent research showing that the recession is over, and that growth has resumed — albeit at a slower pace than what was originally expected.

Economic Strengths Highlighted:

1. Growth is ongoing on a national level
2. Inflation levels remain exceedingly low
3. Business spending is rising

As expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period”.

There were no surprises in the Fed’s statement so, as a result, the mortgage market’s reaction to the release has been neutral. Mortgage rates in Iowa are thus far unchanged this afternoon.

The FOMC’s next meeting is a 2-day affair scheduled for November 2-3, 2010.

Fed Funds Rate to Remain Unchanged

Yesterday, in its first meeting in 6 weeks, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged.

The Fed Fund Rate remains at a historical low, within a prescribed target range of 0.000-0.250 percent.

In its press release, the FOMC said that, since June, the pace of economic recovery “has slowed”. Household spending is increasing but remains restrained because of high levels of unemployment, falling home values, and restrictive credit.

Yesterday’s statement shows less economic optimism as compared to the prior year’s worth of FOMC statements dating back to June 2009. The Fed is looking for growth to be “more modest in the near-term” than its previous expectations.

Not All Bad News to Consider

Weaknesses aside, the Fed highlighted strengths in the economy, too:

1. Growth is ongoing on a national level
2. Inflation levels remain exceedingly low
3. Business spending is rising

As expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period”.

There were no surprises in the Fed’s statement so, as a result, the mortgage market’s reaction to the release has been neutral. Mortgage rates in Iowa are unchanged this afternoon.

The FOMC’s next meeting is scheduled for September 21, 2010.

Sticking to Their Guns

This afternoon, the Federal Open Market Committee (a.k.a. “The Fed”)  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”.

A closer look into the past would see that this is a slight change 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.  Is anyone else wiping the sweat off their brow?  I am.

The economy is not without threats, though, and the Fed identified several:

1. High unemployment continues to threaten consumer spending
2. Housing starts are at a “depressed level”
3. 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 in Urbandale are unchanged this afternoon.

The FOMC’s next scheduled meeting is  April 27-28, 2010.

January 27th 2010 — FOMC Meeting

On Tuesday, the Federal Open Market Committee decided to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

In the Fed’s press release, it was noted that the U.S. economy “has continued to strengthen”, that the jobs markets is getting better, and that financial markets are supportive of growth.

I generally agree with all of these statements.

However, there was no mention of the housing market’s strength.  The last 3 statements from the Fed included that specific verbiage.  Was that intentional?  Your guess is as good as mine.

Most importantly, it’s the fifth straight statement in which the Fed spoke about the economy with optimism.  This should signal to markets that 2008 and 2009 recession is over and that economic growth is returning to U.S. economy.

The Fed is Still Optimistic

The economy isn’t without threats, however, and the Fed identified several important points in its press release, including:

1. Consumer credit remains tight
2. Businesses are still reluctant to hire new workers
3. Housing wealth is down (shocker….)

The message’s overall tone did seem positive and inflation appears is still within tolerance.  Which again, is a *very* big deal when it comes to mortgage rates.

Most Importantly

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period” and to wind down its $1.25 trillion commitment to the mortgage market by March 31, 2010.  This is extremely noteworthy because Fed insiders estimate that the bond-buying program suppressed mortgage rates by one percent through 2009.

Mortgage market reaction to the Fed press release is, in general, negative. Mortgage rates in Iowa are rose this afternoon.

The next Fed meeting is scheduled for 3/16/2010.

If you’re currently monitoring mortgage rates, I’d love to help give you my insight on your personal situation.  I’d love to help out!

1 Down, 7 to Go in 2010

The Federal Open Market Committee ended a scheduled, 2-day meeting yesterday in Washington.  It’s the first of eight scheduled meetings for the policy-setting group in 2010.

The group ended their meeting at 2:15 PM ET.

After the meeting is over, the Fed quickly issues a press release to the markets recapping its views of the country’s current economic condition, and their outlook on things.

The post-meeting statements from the Fed are generally brief but comprehensive. And Wall Street loves every word.  Each piece of it is carefully dissected in the hope of gaining an investment edge over other active traders.

It’s for this reason that mortgage rates tend to be goofy on days the FOMC adjourns. It’s because Wall Street is frantically re-balancing its bets.

Yesterday was No Different

After the meeting, the FOMC said that they decided to leave the Fed Funds Rate within its target range of 0%-0.25%  — the lowest it’s been in history.  It’s what the Fed said on Wednesday that will matter.  Not so much what it did (or didn’t) do.

After the Fed’s last meeting in December, it made several observations:

1. The jobs market is getting better, or as they put it, “less worse”
2. The housing sector is making some improvements
3. Financial markets are slowly stabilizing further

As the Fed told us, markets are slowly improving, but there are still risks to the economy ahead.  Most importantly when it comes to mortgage rates, inflation remains in check.

As compared to December’s press release, yesterday’s FOMC statement will be closely watched. If the Fed changed its verbiage in any way that alludes to strong growth and/or inflation in 2010, expect mortgage rates in Urbandale to rise as Wall Street moves its money from bonds to stocks.  It’s just the way the process works.

Conversely, reference to slower growth in 2010 should lead rates lower.  However, I think there are too many moving parts to comfortably predict this.

If you’re currently looking for a mortgage, contact me!  We’re easy to work with.  And, our rates are pretty good too!