News

Fed Keeps Rates Stable - what does it mean for mortgage rates?
|
by Keith Luedeman, CEO   

News 

Note: During the period from December of  2008 until December 2015, there were very little change to the Fed Funds Rates.  Below is a history of the Fed Announcements during that time.

10/28/2015 -
December Expectations?
 
For the 56th consecutive meeting, the FOMC has decided to keep its overnight target rate unchanged.  However, in a direct reference to its next policy meeting they put a December rate hike firmly in play.  The market had expected no increase in October, but the December direction was a bit of a surprise.

The central bank also downplayed recent global financial market turmoil and said the U.S. labor market was still healing despite a slower pace of job growth.

"In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress - both realized and expected - toward its objectives of maximum employment and 2 percent inflation," the Fed said in a statement after its latest two-day policy meeting.
 
Prior to this meeting, expectations were for a March Rate hike. Market watchers are unsure if this is testing the market, or, showing their hand as to not spook the market. 
 
Text of the full release here.

8/17/2015 -
Fed Waits Again.
 
For the 55th consecutive meeting, the FOMC has decided to keep its overnight target rate unchanged at 0.00% to 0.25%. The decision is a bit of a surprise in that half of economists and 30% of market-participants believed the Fed would go ahead with its first rate increase since 2006. However, citing global concerns and a desire to be certain that inflation would trend back towards the Fed’s target, the Committee decided against ending its Zero-Interest-Rate Policy (ZIRP). Now attention will turn to December with a slight bias toward a 25 basis point rate increase then. Immediately after the release of the Summary of Economic Projections, the December Fed Funds Futures contract was pricing in a 50.4% chance of an increase by December. However, having been given the chance to hike rates today, the markets will likely question the Fed’s resolve in December as well.
 
Almost all of the changes to the FOMCs language revolved around global developments. According to the Statement, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” While the Committee still sees the outlook as nearly balanced, they added that they are “monitoring developments abroad.” In addition, the Statement notes the drop in market-based expectations of inflation. Apart from the insertion of global concerns and lower inflation expectations in the Statement, the only other change of note was an improved outlook for business fixed investment.
 
The FOMC also lowered their projected path forward for interest rates. The median forecast for the 2015 year-end overnight rate was lowered from 0.625% (implying two hikes) to 0.375%. However, there are now four participants who do not think the first hike should occur this year, up from two in the June Summary of Economic Projections. The median forecast for year-end 2016 is now down from 1.625% (6 hikes) to 1.375% (5 hikes). Additionally, the longer-run forecast for the overnight rate was dropped once again. Fed officials now see the terminal rate for Fed Funds at just 3.50%, down from 3.75% in June and 4.00% last December.
 
Text of the full release here.

7/29/2015 -
Fed Keeps Rates the Same, Wall Street Looking for Clues.
 
In a move widely expected on Wall Street, the U.S. central bank's Open Market Committee kept its key funds rate near zero. There had been some anticipation the FOMC would provide at least few code words indicating that it was ready to move, but there was scant evidence in the post-meeting statement.

Market reaction was generally positive though not decisively so.

The Fed characterized economic growth as moderate but said inflation indicators "remain low." The committee noted that "business fixed investment and net exports stayed soft." However, the FOMC characterized job gains as "solid," something the market interpreted as perhaps hawkish for the future of rate hikes and keeping September in play for a move.

Futures traders moved their bets that the next increase will now be in December, rather than September of this year.

The FOMC voted to leave its overnight target rate unchanged at 0.00% - 0.25%. 
  
Text of the full release here.
 
6/17/2015 -
Fed Lowers Expectations, Stays on September Course
 
In its first “live” meeting since August 2011 when the Fed effectively committed to keeping rates at zero through 2013, the FOMC voted not to change the overnight target rate from 0.00% - 0.25%. However, the overall economic assessment was upgraded qualitatively despite a downgrade in the 2015 GDP projections. Despite the weaker growth outlook, the Fed still plans to raise rates this year.
 
The Official Statement makes note of the recently improved labor and retail sales data. The April Statement read that “the pace of job gains moderated and a range of labor market indicators suggests that underutilization of labor resources was little changed.” The June Statement upgrades that outlook, saying “The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat.” Regarding consumption, the April Statement said that “growth in household spending declined.” After the strong May retail sales report, the June Statement was more optimistic, saying “growth in household spending has been moderate.”
 
In the Summary of Economic Projections, the Fed now projects the economy to expand at a paltry 1.8 - 2.0% in 2015, down from its previous forecast of 2.3 - 2.7%. Despite that weaker forecast, the Committee still appears committed to raising its target rate. Once again, 15 of 17 participants believe the first rate increase will occur in 2015. However, the pace of rate increases once they begin was lowered. In the March SEP, 14 of 17 participants believed there would be two or more rate increase in 2015. In the June iteration, only 10 believe there will be two or more in 2015 (still a majority, although a smaller majority). There are now 7 FOMC participants who believe there will be one or no rate increase this year. The median forecast for the Fed Funds target rate by YE2016 was reduced from 1.8i75% to 1.625% while the forecast for YE2017 was revised lower from 3.125% to 2.875%.
 
As it relates to longer-run GDP growth, the Fed still believes the economy will level out at 2.0 - 2.3% growth. Despite such a weak growth forecast, the terminal Fed Funds rate projection remained at 3.75%.  With a lower growth forecast, one would expect both short term and long term rates to remain lower.
 
The FOMC voted to leave its overnight target rate unchanged at 0.00% - 0.25%. 
  
Text of the full release here.

4/29/2015 - Economy Expanding at Slower Pace, Says May Be Temporary.
 
The FOMC made slight tweaks to its April Official Statement characterizing the economy in less favorable terms, noting the weaker growth over the winter months, referencing weaker price pressures. Interestingly, the Committee credits the weak winter growth only “in part” to temporary factors. Implicitly, part of the problem is more durable. As it relates to inflation, the Statement says that inflation remains below their target and also attributes this “partly” to the decline in energy prices. However, they credit part of inflation running below target to cheaper prices of non-energy imports, although they do believe this will also be transitory. Apart from households’ real income and consumer confidence, every characterization of the economy is negative:
 
“Economic growth slowed during the winter months”
“The pace of job gains moderated”
“underutilization of labor resources was little changed”
“Growth in household spending declined”
“Business fixed investment softened”
“Recovery in the housing sector remained slow”
“Exports declined”
 
The FOMC voted to leave its overnight target rate unchanged at 0.00% - 0.25% for the 80th consecutive month. The vote was unanimous.
  
Text of the full release here.
 
3/18/2015 -
Economy Expanding at Slower Pace, "Patience" is Removed.
 
The Fed voted to leave its target rate a 0.00% to 0.25% while dropping its forward guidance stating that they could be “patient” in normalizing monetary policy. The move was largely expected. In addition, they added a dovish bias to their Statement saying that they want to be “reasonably confident that inflation will move back to its 2 percent objective over the medium term” before they commence raising rates. With inflation running so low at this point, and very few signs of an increase to 2% in the near term, this phrase will be interpreted as pushing the initial rate increase farther into the future. In their description of the economy, they were a bit less optimistic. Rather than saying that the economy is growing at a “solid pace,” the Statement now says that activity has “moderated somewhat.” The Statement also notes that “export growth has weakened.”
 
More interestingly than the changes in the Official Statement, significant changes were made to the Fed’s projections for the overnight target rate. In their Summary of Economic Projections, the median forecast for the overnight rate by year-end 2015 was revised down from 1.125% in December to 0.625%. However, 15 of 17 participants still believe the first rate increase will occur in 2015. The FOMC’s median projection for the overnight target rate by year-end 2016 was revised down from 2.50% to 1.88%. Clearly, the Fed is signaling to the markets that take-off is expected to be much slower than in previous projections. Also in the FOMC projections, GDP growth for 2015 was revised lower from 2.6-3.0% to 2.3-2.7% and for 2016 from 2.5-3.0% to 2.3-2.7%. The unemployment rate is now expected to fall slightly faster. Inflation expectations, which now become very important to future policy decisions, for 2015 were revised down from 1.0-1.6% to 0.6-0.8% and for 2016 from 1.7-2.0% to 1.7-1.9%.
 
The Committee left their target overnight rate unchanged between 0.00% and 0.25%.

Short Treasury yields are lower as the belief is now that the Fed may raise rates slower than some previously expected IF inflation is weak and exports continue to fall with the strong dollar.
 
Text of the full release here.
 
1/28/2015 -
Economy Expanding at Solid Pace, Continued Patience Needed
 
The FOMC made very minor changes to its January Official Statement, noting the improving economy but not altering the current guidance for monetary policy. After making the change from “considerable time” to “patience” in their December Statement, the FOMC reiterated again today that they can be patient in their approach to raising rates. The Statement does acknowledge a slightly better pace of growth for the economy, characterizing the recent growth as “solid” rather than “moderate,” as they described it back in December. It also notes the improving labor market conditions and the boost to consumption resulting from lower energy prices. As it relates to inflation, the Statement says, “Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

The Committee left their target overnight rate unchanged between 0.00% and 0.25%.

Short Treasury yields are lower as the belief is now that the Fed may raise rates slower than some previously expected.
 
Text of the full release here.
 
12/17/2014 -
Fed Brushes Aside Disinflation Concerns, Moves Rate Language to "Patience"
 
Just like in 2004, when the Fed moved from “considerable period,” the Fed has now switched to saying it can be patient before raising rates. In the 2004 experience, patience lasted 6 months. According to the FOMC’s Official Statement today, “the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” The Statement also goes on to say that this guidance is consistent with its previous guidance that it would be a considerable time before it raised rates following the conclusion of QE in October, a transitional Statement of sorts. This has created some confusion for the media, but the bottom line is that the Fed has taken one more step in the slow moving process toward tightening policy.

As it relates to inflation, the Committee is not showing signs of concern relating to the sustained drop in oil prices and global deflation risks. Instead, the Statement notes that, “The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

The Committee left their target overnight rate unchanged between 0.00% and 0.25%.

Very unusually, there were three dissents. Minneapolis Fed Bank President Kocherlakota believes the FOMC is not defending its 2% inflation target aggressively enough. Dallas Fed Bank President Fisher believes the economy is hotter than others on the Committee believe. Philadelphia Fed Bank President does not believe they need to include this transitional Statement which ties “patience” to the previous verbiage of “considerable time.”

In the Fed’s Summary of Economic Projections, GDP growth in 2015 was unchanged, the unemployment rate is expected to be a bit lower, and inflation is expected to be much lower. The expected range for inflation in 2015 was lowered from 1.6-1.9 to 1.0-1.6. Despite that lower inflation expectation, all but two Fed members expect the target rate to be increase next year. However, the median forecast for the target rate is now expected to rise more gradually once they do raise rates. The median rate forecast for YE2015 in September was 1.375%. This has been lowered to 1.125%. The median YE2016 forecast was 2.875% which is now down to 2.50%. This is consistent with the view that the Fed will try to raise rates in 2015 but will not do so very slowly.

The market response has been mixed. Short Treasury yields are lower as the belief is now that the Fed may raise rates slower than some previously expected. The 2-year Treasury yield is down from 0.59% to 0.52%. This has also helped lift stocks with the DJIA up over 100 points after the announcement.
 
Text of the full release here.
 

10/29/2014 - Fed Ends QE3, Will Keeps Rates Low for "A Considerable Time."
 
The FOMC voted to leave the Fed’s target interest rate unchanged at 0.00% to 0.25% for the 49th consecutive meeting today. In addition, they concluded the third round of large scale asset purchases (“QE3”), indicating that bond purchases will end in October. Thereafter, the Fed will continue to reinvest the cashflows from the S.O.M.A. portfolio, but will not add to their holdings. The FOMC did not provide details on whether or not they would use QE as a monetary policy tool in the future. To support the end of QE, the Statement noted “there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program.” All told, the Fed has now increased their balance sheet through three rounds of quantitative easing by $3.7 trillion, from 6.2% of GDP to 25.7% (see Charts Below).

The hotly debated phrase “considerable time” was left in the Statement. This references how long it will be before the Fed raises its target rate once the asset purchase program is concluded. What “considerable time” means has taken on an entire life of its own with some officials suggesting 3 months, some saying 6 months, and others saying anywhere from 3 months to 2 years. The phrase is likely to be removed before year-end, but the markets should take this in stride. Already, the market does not expect a rate increase for another year or longer. The FOMC continues to focus the market on data dependency and away from a time frame regarding raising its target rate. The FOMC added the following language to the Statement to focus on data dependency. “However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”

The general economic assessment language was unchanged: “economic activity is expanding at a moderate pace.” The continued improvement in labor market conditions was acknowledged in the Statement noted by “solid job gains and a lower unemployment rate.” “There remains significant underutilization of labor resources” was removed and replaced with “underutilization of labor resources is gradually diminishing”.
 
Text of the full release here.
 
9/17/2014 -
Fed Sees Weaker Growth Long-Term, Quicker Rate Increase in 2015
 
The FOMC voted to keep the overnight target rate at 0.00 to 0.25% for the 48th consecutive meeting today. They also trimmed their bond purchase program by another $10 billion meaning they will now make $15 billion in monthly purchases. The QE program is expected to be concluded entirely at the FOMC’s October meeting. As it relates to some of the questions going into the meeting, they did not remove their “considerable time” language and did not acknowledge that the labor market underutilization is improving. However, they did adjust their assessment of inflation saying that is “has been running below the Committee’s longer-run objective.” This was a change from the last Statement which said that “Inflation has moved somewhat closer to the Committee’s longer-run objective.” All in all, the Official Statement is a bit dovish.

The Summary of Economic Projections tells a different story. There are three highlights to the September SEP. First, the Fed’s median Fed Funds forecast for YE 2015 has moved up once again. At the December meeting, the median forecast was 0.75%. In March, that forecast was raised to 1.00%. IN June, the forecast was raised to 1.125%. And in the September SEP, the median forecast for the Fed Funds rate is at 1.375%. Clearly, the median opinion of participants is that the overnight rate will have to be raised more quickly than initially expected. This is putting pressure on shorter Treasuries, pushing prices down and yields higher immediately after the release.

The second point of interest in the SEP is that they have again lowered their longer-run growth forecast for the economy. The central tendency forecast for longer-run GDP has been lowered from 2.1-2.3% to 2.0-2.3%. This is helping give longer maturities a better bid as a weaker growth forecast inevitably means lower rates over time.

The third point of interest in the SEP is they have switched from forecasting the Fed Funds rate In 1/4s to 1/8s. Previously, all of the forecasts were denominated in 0.25% fractions. In the September projections, the forecasts are denominated in 0.125% fractions. This indicates that the Fed will try very hard to micro-manage interest rates as they try to end QE and eventually raise the overnight target rate.
 
Text of the full release here.
 
7/30/2014 -
Fed Satisfied with Inflation
 
The FOMC voted to reduce its asset purchase program another $10 billion per month, from $35 billion to $25 billion. As expected, they also left the overnight rate unchanged at 0.00-0.25%. The Statement also supports the idea that there remains labor market slack, saying, “a range of labor market indicators suggests that there remains significant underutilization of labor resources.” One can read this to say that they remain unsatisfied with the progress of the labor market even after the unemployment rate has dropped to 6.1%. However, as it relates to their other mandate - inflation - they believe they are making progress. The Statement says, “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
 
In total, today’s Statement gives a little more respect to core inflation moving toward 2% than Chairwoman Yellen did after the June meeting when she qualified it as being “noise,” it acknowledges improvement in the unemployment rate, but it also reaffirms that they are not yet satisfied with the labor market. As a result, the normalization of monetary policy will not yet begin. This is, however, a small pivot toward saying that they believe the economy is meeting the objectives of their dual mandate. Philadelphia Fed Bank President Charles Plosser dissented to saying that “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”
    
Text of the full release here.
 
6/18/2014 -
Fed Sees Overnight Rate Rising, but Lower Long-Term.
 
On Wednesday, the FOMC announced a fifth $10 billion reduction to its quantitative easing program, reducing its monthly bond purchases to $35 billion and keeping pace with earlier guidance. The reduction is evenly split between bonds and mortgage-backed securities.
 
The FOMC voted today to keep the overnight target rate unchanged at 0-00 to 0.25% and to cut its QE3 bond purchases by another $10 billion to $35 billion.  There were only a few tweaks in the language of the Official Statement, mostly noting slightly better economic conditions.  The Official Statement makes note of the improvement in business fixed investment and says that even though the unemployment rate keeps falling, it “remains elevated.”  Below are some comparisons of the language used in this Official Statement versus that of the April Statement.
 
The bigger changes coming from this FOMC Meeting can be seen in the Summary of Economic Projections (SEP).  Specifically, the median outlook for the overnight target rate was raised for 2015 while the median outlook for the “longer-run” overnight target rate was reduced.  In the March SEP, there were 11 participants who believed the target rate would be at-or-below 1.0% by the end of 2015.  In the June SEP, there are only 8 who believe this.  The average expectation for the overnight target rate was 1.13% in the March SEP and is now up to 1.20% in the June SEP.  Additionally, the SEP shows that more participants believe the longer-run overnight target rate will be 3.75% rather than 4.00%.  In the March SEP, 8 participants believed the longer-run rate would be 4.0%.  In the June SEP, only 3 believe it will be 4.00% while 7 now believe it will be 3.75%.
 
Text of the full release here.
 
4/30/2014 -
Fed Continues Taper of Bond Purchases, Economic Activity Up, but Uneven.
 
On Wednesday, the FOMC announced a fourth $10 billion reduction to its quantitative easing program, reducing its monthly bond purchases to $45 billion and keeping pace with earlier guidance. The Fed will cut monthly mortgage bond purchases to $20 billion from $25 billion. Treasury purchases will drop to $25 billion a month from $30 billion.
 
In a statement on its latest policy move, the FOMC wrote, “Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.”

Each month of last year the Fed purchased $85 billion worth of bonds as part of its efforts to simulate an American economy that had shown lackluster progress since the 2008 recession. In December the FOMC cut monthly asset purchases to $75 billion noting that the economy was moderately expanding. The committee pledged to keep a close watch on economic data but implied — barring significant changes to its outlook — investors should expect the same small measured cuts at subsequent meetings. At each of its meetings since — January, March and now April – the FOMC cut $10 billion while maintaining a tight grip on interest rates.

Last month, with most Fed watchers seeing further reductions to QE as inevitable, the FOMC and others turned their attention to the federal funds rate — a separate central bank tool that determines how expensive it is to borrow money. In March, the committee reaffirmed its commitment to low interest rates — the target range for the federal funds rate has been 0% to 25% since December 2008, a record low — by removing references to the 6.5% unemployment threshold it had previously used to give a sense of when it would allow the controlling interest rates to rise.

With the unemployment rate down from a high of 10% to 6.7%, however, Yellen and co. felt that other economic indicators were not yet strong enough to defend higher rates. Instead of a specific unemployment rate the March and April statements have said the committee’s assessment will “take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

The committee is on track to draw quantitative easing down to zero by the end of the year. Currently the market is anticipating a bump to the federal funds rate about six months later.
 
Text of the full release here.
 
3/19/2014 -
Fed Continues Taper of Bond Purchases, No Interest Rate hike Coming Soon.
 
The FOMC decided to pare back its asset purchase program by $10 billion, from $65 billion to $55 billion per month.  The cuts will be made equally to the MBS and Treasury purchases.  They also voted to leave the overnight Target Rate unchanged at 0.00% to 0.25% and removed the forward guidance indicating that it would be well past the time that the unemployment rate drops below 6.5% before they expect to make their first rate increase.  Replacing the previous forward guidance, the Official Statement now notes, “In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”  They also note that “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”  There is nothing solid about this forward guidance and is a step back from policy transparency. 
 
As for the economic outlook, the Statement now says that the underlying growth rate of the economy is “sufficient...to support ongoing improvement in the labor market.”  This Statement implies that the pace of the economy is solid enough to not need additional stimulus.  The Statement also recognizes that the economy has slowed in recent months “in part reflecting adverse weather conditions.”

The 10-year Treasury yield ROSE after this announcement.  The market was a bit concerned about the lack of transparency. In total, the Fed is still purchasing more bonds than are being produced, so this is still the best time for them to taper.  However, overall this is a short term negative for mortgage rates.

The additional good news is that the overnight rate will not start going up anytime soon - still good news for rates.  Steady as she goes.
  
Text of the full release here.
 
1/29/2014 -
Fed Continues Taper of Bond Purchases
 
The FOMC voted to leave its overnight target rate unchanged at 0.00% - 0.25%, and cut its monthly bond purchases from $75 billion to $65 billion. The results are largely as-expected. They also continue to say that it will be "well-past" the time that the 6.5% unemployment rate is reached before they expect to increase the overnight target rate.

In their economic assessment, the Fed did make reference to the still-unsettled housing data. In the December Statement, they noted that the "housing sector slowed somewhat in recent months." In the January statement, they reiterated the December assessment. They also noted the mixed messages from recent labor market reports, stating "Labor market indicators were mixed but on balance showed further improvement".

Voting for the FOMC monetary policy action was unanimous for the first time since 2011.

The 10-year Treasury yield continues to trade at 2.70% immediately after the release. The DJIA, down over 100 points on the day already, has declined additional 100 points since the news. In total, the Fed is still purchasing more bonds than are being produced, so this is most likely the best time for them to taper.  However, overall this is a short term negative for mortgage rates.

The nugget of good news is that the overnight rate will not start going up anytime soon - good news for rates.
  
Text of the full release here.
 
12/18/2013 -
Fed Begins the Taper of Bond Purchases
 
Chairman Bernanke hosted what is likely to be his final press conference and provided a few noteworthy details regarding monetary policy.  On one hand, Chairman Bernanke insisted that policy was not being tightened.  On the other hand, he argued that the economy has made enough “meaningful cumulative improvement” to warrant fewer asset purchases.  The reality may be in his explanation of the difference in asset purchases (QE) and interest rate policy (the target rate and the associated forward guidance).  He explained that asset purchases have been a “supplementary tool” because their benefits and risks are much less familiar.  He conceded that the risks increase with asset purchases as the Fed’s balance sheet grows.  Reading between the lines, the Fed is reducing its reliance on a “supplementary” tool in exchange for more aggressive use of its interest rate policy.  It is a healthy switch given the lack of confidence being created by perpetual balance sheet growth.  The question that is yet to be answered is how effectively forward guidance will be at driving interest rates.  To date, it has been effective.      

And now the debate, and the market’s attention, will turn to how quickly the Fed will completely end their third round of asset purchases if they can at all.  They began the process today by announcing that they will pare back monthly purchases of Treasuries in January from $45 billion to $40 billion and MBS purchases from $40 billion to $35 billion.  This is largely a symbolic cut given that they are still purchasing a larger percentage of net issuance from both the Treasury and MBS sectors than when they began the program (because there is less mortgage volume, and their purchases have remained constant.)  However, it is at least a start and should give the markets some confidence that the Fed is willing to try to cut back on what many view as a high-risk/low-reward program.  

As expected, they wrapped this “hawkish” move with much more “dovish” forward guidance saying that it would be appropriate to keep the target rate at its current level “well past the time that the unemployment rate declines below 6.5%...”  They also changed their language from saying that they “anticipate” inflation moving back toward its 2.0% target to say that they are “monitoring inflation developments carefully for evidence” that it will do so.  This is a carefully worded shift to bring lower-than-target inflation into focus as a potential reason to add back more accommodation, and to keep interest rates from moving sharply higher.     

Rather they will be able to completely wind down the purchases anytime soon is another topic entirely.  Today’s move could push longer bond yields higher in the short-term which should have a self-correcting effect on bond prices.  The higher rates go, the more likely the market is to expect more Fed intervention via communications or even increasing bond purchases.  Immediately following the announcement, bond yields are largely unchanged with the 10-year yield dropping from 2.87% to 2.85%.  Stocks are sharply higher.      

Boston Fed Bank President Eric Rosengren dissented from the Statement saying that it is “premature” to make changes to the purchase program.

Separately, Reuters is reporting that Yellen’s confirmation may come on Friday according to a senior Democratic aide.

Overall, this is a short term negative for mortgage rates.
  
Text of the full release here.

10/30/2013 -
Fed Extends Stimulus
 
In a statement released after the conclusion of its policy meeting,  the Fed pointed to government spending cuts, the shutdown, and debt ceiling as 'restraining economic growth.'  While the Fed also characterized the overall economy as expanding as a 'moderate pace,' it did downgrade it's assessment of the housing market, partly due to rising rates. 

The central bank has been buying $85 billion in bonds every month since September 2012, and has said it will continue to do so until the job market improves "substantially." The program is now nearing $1 trillion in total, yet that goal remains elusive.

Initially it was thought the Fed would begin tapering by the end of 2013, but now the decision depends on economic data.  The goal is widely thought to be a an economy adding 200,000 jobs a month.

Overall, this is a positive for mortgage rates.
  
Text of the full release here.
 
9/18/2013 -
Fed Acknowledges Risk to Deflation
 
The FOMC made a fairly major chance in it's stance today - reversing the laid out path to reducing bond purchases.  The Official statement said "Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate."

In the post-FOMC press conference, Chairman Bernanke cast doubt the purchases will be slowed in 2013, and also refuted the 7.0% unemployment target.  He also said not only would unemployment target matter, that also inflation needs to be in line with the Fed's 2% target.  (Lower means risk of deflation)  Well, even the Fed doesn't think it will get there until 2016. 

Overall, great news for mortgage rates.
 
Text of the full release here.

7/31/2013 -
Fed Acknowledges Risk to Deflation
 
The FOMC voted to continue buying bonds at a $85 billion per month pace and to keep the overnight target rate exceptionally low at 0.00% to 0.25%. There were very few changes to the Official Statement, but the biggest change is noteworthy.

The Fed finally acknowledged in a substantive way that inflation “persistently below its 2.0% objective could pose risks to economic performance.” While they still expect inflation to rise back up to 2.0% in the “medium term,” acknowledging the risk of disinflation is certainly a dovish move.

They continue to think that the economy will pick up steam in coming quarters. They also note that mortgage rates have risen recently although they do not express a direct concern about that at this time.

A bit surprisingly, the market response to the Statement has been minimal immediately after its release. The 10-year yield is down 1 basis point. Acknowledging the risk to disinflation could change the calculus for when the Fed slows asset purchases or how quickly they do so, particularly if the leadership of the Fed believes that asset purchases stimulate prices (as Bernanke does). As such, this Statement should be constructive for bonds and thus mortgage rates.
 
Text of the full release here.
 
6/19/2013 -
Fed Lays Out Plan to Reduce Bond Purchases
 
Rates are up substantially post-Fed announcement today. The expectation heading into the Fed meeting was upheld by the Committee and Chairman Bernanke – that asset purchases would likely be tapered in the coming months. The general sentiment continues to be that this process will begin in September. However, there was one bit of new information that was absent from expectations – the introduction of an end-point for asset purchases. The general belief coming into the meeting was that the Fed would cut the purchases from $85 billion to something like $70 billon at the September meeting. They would then be expected to let that sit for a while, then increase or decrease purchases as the data dictated. The presumption was that it would be a long process to tapering purchases all the way down to zero. Chairman Bernanke, however, in his press conference said that the Committee generally believed that the purchases would be phased out completely once the unemployment rate dropped to 7.0%. According to the Fed’s own economic projections, that is expected to occur in 1H 2014. This is a more aggressive wind-down of purchases than was generally expected and has introduced to investor paradigm the unwelcome notion that purchases will be finite. Bernanke later said that "Anyone that deduced from his guidance that purchases would end in the summer of 2014 was wrong."  Mixed signals for sure.

Chairman Bernanke walked a fine line trying to keep the markets from panicking. In trying to offset the impact of tapering, Bernanke said that the overnight rate might stay low for an even longer period of time than the 6.5% unemployment rate threshold. He went on to say that once thy do raise the rate, it would be done so only gradually. And he added that the Committee had determined that they would not sell their MBS securities once they began to normalize policy, but would instead hold those to maturity (or at least until they paid down to low balances). Of source, this is a prescription for action that will occur once Chairman Bernanke is no longer at the helm of the Fed. Despite this guidance, the markets were much more focused on the shorter-term impact of slowing purchases, thus the selling of bonds which caused rates to rise.
 
Text of the full release here.
 
5/1/2013 -
Fed Ready to Increase or Decrease Purchases
 
The FOMC’s announcement on Wednesday made a noticeable change to its discussion of QE, saying “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” After speeches from Fed officials in March led the market to anticipate a tapering of purchases later this year, recent soft data and declining inflation seem to have dashed those expectations and led to questions about whether the Fed would contemplate additional measures. The change gives the Fed greater flexibility to allow it to react more quickly should the FOMC conclude that changes to their purchase plans are needed. For now, the Fed has not backed off of its economic assessment, noting that “economic activity has been expanding at a moderate pace.”
 
Apart from this change, the only other change of significance is the acknowledgement that fiscal policy is, in fact, “restraining economic growth.” Kansas City Fed Bank President Esther George dissented to the Statement, once again. She is concerned that excessively easy monetary policy risks future financial stability and inflation.

The markets have had very little reaction to the release of the Statement.
 
Text of the full release here.

3/20/2013 -
Fed Holds Firm to Stimulus Plan Despite Improvement in Economy
 
The Federal Reserve decided on Wednesday to hold interest rates at their historic lows and to maintain $85 billion in monthly bond-buying stimulus despite a more optimistic labor forecast from the central bank.  While the Federal Open Market Committee upgraded its unemployment rate outlook for the next three years, the Fed’s monetary policy arm dimmed its growth guidance slightly.

Fed officials said the world's largest economy had returned to moderate growth after a pause in the fourth quarter of last year. They also noted positive, if insufficient, strides in the labor market.  "The housing sector has strengthened further, but fiscal policy has become more restrictive," the Fed said in a nod to recent spending cuts in Washington.

"The committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability," the U.S. central bank said.

In contrast, estimates for the unemployment rate, a key metric for the central bank, were slightly more benign, if still too high for most policymakers' comfort. The Fed now believes the jobless rate, which registered 7.7 per cent in February, will average 7.3-7.5 per cent in the fourth quarter of 2013, down from 7.4-7.7 per cent in December.

Unemployment will not fall to 6.5 per cent, the level at which central bankers have suggested they will begin to consider raising rates, until 2015, the estimates show.
                         
Text of the full release here.

1/30/2013 -
Fed Holds Pat, No Mention of Slowing Purchase
 
The FOMC’s Official Statement for their first meeting in 2013 shows little change to the existing Statement. The Statement does make reference to better business investment. It also notes that global market strains have eased although the Committee continues to see downside risks. Referencing the 4Q weakness in economic activity, the Statement refers to this as being the result of “transitory factors.”
 
The markets were expecting little news from the Statement and that is what they are getting. It seemed unlikely coming into the meeting that the Fed would change much of their Statement given that relative infancy of the current monetary policy decisions. There was a risk that the Committee might talk more about when they would consider slowing asset purchases. However, if they did, it did not rise to the importance of being mentioned in the Statement (the Official Minutes will be more telling of this). Had that been mentioned in the Statement, there may have been a rally in bonds (lower yields) and a sell-off in stocks. Immediately following the release of the report, the 10-year Treasury yield is slightly lower at 2.01%.
 
With Richmond Fed Bank President Jeffrey Lacker no longer voting (because of the 2013 rotation of voting Members), Kansas City Fed Bank President Esther George took up the mantle of dissenting from the current state of monetary policy. This is likely a representative dissent, giving voice to the handful of regional bank presidents who disagree with the newest asset purchase programs. While there is dissent amongst the Members, the majority still favors continuing to purchase bonds. Most importantly, Chairman Bernanke has shown no hints of backing off for the time being. According to the Statement, they will continue purchases if “the outlook for the labor market does not improve substantially.”
                         
Text of the full release here.

12/12/2012 -
Fed Expands Bond Purchases
 
In contrast to the FOMC Statement which seemed to be more positive on economic activity, the Fed’s economic projections show a weaker economic forecast despite the newly announced monetary stimulus (see S.E.P. below).  If conditions warrant, the Fed could make $1 trillion in asset purchases in 2013.  Given that the Fed’s forecast calls for the unemployment rate to still be 7.4-7.7% with inflation below 2.0% by 4Q13, one could presume that they could easily be making purchases throughout the year.  The unemployment rate projection for 2013 was only reduced 0.2% despite the added stimulus.  The unemployment rate is not expected to reach 6.5% until 2015.  Furthermore, despite the new purchases the Fed revised lower their overall projections for GDP growth in 2013, dropping the projections from 2.5-3.0% to 2.3-3.0%.  Perhaps even more interesting, inflation expectations were not revised higher.
 
GDP growth forecasts for 2012 were revised lower from 1.7-2.0% to 1.7-1.8%. This implicitly means that the Fed is expecting growth in 4Q to possibly come in below 1.0%.
 
Federal Reserve said it will buy $45 billion a month of Treasury securities starting in January, expanding its asset-purchase program, and it linked the outlook for its main interest rate to unemployment and inflation. "The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor-market conditions," the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. The Fed said interest rates will stay low "at least as long" as the unemployment rate remains above 6.5 percent and if inflation "between one and two years ahead" is projected to be no more than 2.5 percent. The buying announced today will be in addition to $40 billion a month of mortgage-debt purchases (don't forget that the $40 billion is over and above prepay reinvestments). The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed's holdings.
                         
Text of the full release here.

10/24/2012 -
Fed Maintains a Consistent Message
 
As expected, the FOMC voted to leave the overnight interest rate unchanged between 0.00% and 0.25% and to continue the bank’s current bond purchases at their October meeting. The official Statement was left almost entirely intact with very minor changes. Among the minor changes to the Statement’s wording, the Fed noted “a bit” quicker growth in household spending which was highlighted by the September retail sales report. Conversely, the Statement was changed to acknowledge that business investment has, in fact, slowed. If you are keeping score, that is one small positive adjustment and one small negative adjustment to the Statement.

Richmond Fed Bank President Jeffery Lacker also changed the wording of his dissent to add a touch of excitement to the Statement. In the previous Statement, Lacker “preferred to omit” the “mid-2015” language. In this Statement, Lacker “disagreed with” the “mid-2015” language.

The statement included "To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
                        
Text of the full release here.
 
9/13/2012 -
Fed Embarks on Open-Ended Purchase of Mortgage Backed Securities
 
After a two disappointing employment reports and employment rates staying high, the Fed took the step of buying $40 Billion worth of Mortgage Backed Bonds each month. This step is designed to stimulate the economy by boosting the stock market and bringing down rates - making it less expensive for people to borrow and spend.

The Fed said it will spend $40 billion a month to buy mortgage bonds for as long as it deems necessary to make home buying more affordable. It plans to keep short-term interest rates at record lows through mid-2015 - six months longer than previously planned. And it's ready to try other stimulative measures if hiring doesn't pick up.
 
"The idea is to quicken the recovery," Fed Chairman Ben Bernanke said at a news conference Thursday. But he made clear he thinks the economy will need the Fed's intervention even after the recovery strengthens.

They also warned that they would increase the size of the purchases if the labor market does not make improvement.  The purchases will begin tomorrow and they will purchase $23 billion through the end of September.  The Fed will discontinue asset purchases when the outlook for the labor market “improves substantially.”
                        
Text of the full release here.
 
8/1/2012 -
FOMC Holds
 
The FOMC did not change the “keep rates low until late-2014” language in their official Statement today.  In fact, they made very few changes to their policy Statement.  The few changes do reflect an increased likelihood of more accommodation which could come as early as the next meeting in September.  The Statement was changed from saying that “the economy has been expanding moderately” to “economic activity decelerated somewhat over the first half of this year.”  The Committee also changed its language saying that they are “prepared to take further action as appropriate” to say “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed.”  This change is likely intended to tell the markets that they are close to embarking on more policy accommodation.  One of the arguments for the Fed to not take more action at this meeting is that they have not had enough data to verify a weakening economy.  There will be two more labor reports before the Fed’s next meeting in September.

The markets were, however, expecting a little more action today from the Fed and have responded as such.  The Dow Jones Industrial Average fell 44 points and the US Dollar rose 0.5% against the euro immediately following the announcement.  Treasuries are still trying to digest the news with the yield on intermediate maturities rising a few basis points and longer yields dropping slightly.
                   
Text of the full release here.
 
6/20/2012 -
Fed Extends Operation Twist
 
Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Initial jobless claims for the week ending June 16 remained elevated at 387k. The prior week’s figure was revised higher from 386k to 389k. This will continue to pressure the Fed to consider more action.
 
Todays' FOMC action was a slightly more aggressive extension of the Maturity Extension Program (M.E.P.) than was expected. The Fed will now be buying $267 billion in longer Treasuries through the M.E.P., including the entire supply of 30-year Treasury supply this year and they will have no more Treasuries with 3-year or shorter maturities remaining in their S.O.M.A. portfolio.
 
The Fed’s downshift in sentiment was probably more significant than the markets were expecting. It is hard to know how dour the markets were expecting the Fed to be. Apart from Janet Yellen’s comments two weeks ago, there were few signs that sentiment had shifted too dramatically. However, the Summary of Economic Projections released by the FOMC yesterday afternoon reflect a sharp downgrade in outlook (see Chart of the Day). GDP projections were cut from 2.4-2.9 to 1.9-2.4 for 2012, a 0.50% reduction in growth estimates. Projections for 2013 were dropped a similar amount, from 2.7-3.1 to 2.2-2.8. The unemployment rate is seen as not falling any more this year and not much in 2013. The unemployment rate in Q4 2012 is now expected to be between 8.0-8.2 and 7.5-8.0 in Q4 2013. Inflation is seen as dropping further. The projection for Core PCE is now seen as being between 1.7-2.0 by Q4 2012 and 1.6-2.0 by Q4 2013.
 
What does all of this mean? According to the Fed’s new projections, they are expecting 1) GDP growth to remain below 3.0% for another year-and-a-half, 2) very little progress in bringing down the unemployment rate, and 3) inflation most likely trending below their prescribed target. According to their projections, they are missing both sides of their dual mandate. This is why Chairman Bernanke repeated over and over in his press conference that they are prepared to take more action if necessary. We see this as having opened the door to more action from the Fed in the near future.

Text of the full release here.

4/25/2012 -
Fed Keeps Rates The Same, Says Economy is Starting to Expand
  
The April FOMC Statement reflects a slightly better economic outlook, but one which the Fed still believes will result in slow improvement in the labor market.  The FOMC continues to say that the economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”  There is one notable, albeit slight, upgrade to the Statement regarding the overall trajectory of economic growth.  At the Fed’s March meeting, they noted that “The Committee expects moderate economic growth over coming quarters…”  The April Statement reads slightly more upbeat, saying “The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually…”  Housing is still expected to “remain depressed” but the April Statement notes that there are “some signs of improvement.”

Richmond Fed President Jeffrey Lacker dissented, again, saying that he does not agree that conditions will warrant keeping rates “exceptionally low…through late 2014.”

On inflation, the Fed continues to expect the overall rate to remain subdued over the “medium-term” despite the recent increase caused by higher oil and gasoline prices.

Important for mortgage rates, the Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Text of the full release here.
 
3/13/2012 -
Fed Keeps Rates The Same, Says Economy is Starting to Expand
  
The FOMC held their March meeting today, noting in their Official Statement incremental improvement in the economic data while still voting to keep their overnight target rate unchanged. The Fed notes that the data since the January meeting point to a "moderately" expanding economy. They note that "labor market conditions have improved further" and that the unemployment rate has "declined notably in recent months." The Fed continues to believe inflation pressures will subdue even though "prices of crude oil and gasoline has increased lately." They do acknowledge that the increase in petroleum may push up prices in the short term.
 
There was no reference to more quantitative easing in the statement although none would be expected even if it were a topic of conversation. Rather, the markets will take their cue from the general assessment of economic activity which we would classify as slightly improved. We still suspect that QE3 is on the table although the Fed does not appear to be leaning either direction at this point.
 
Richmond Fed President Jeffrey Lacker dissented from the vote preferring not to say it will be 2014 before the next projected rate increase.

Text of the full release here.
 
1/25/2012 -
Fed Keeps Rates The Same, Forecasts No Rate Changes until 2014
  
The FOMC officially adopted an inflation target at the January FOMC meeting of 2.0%. In a press release published at 1:00 p.m. CT following the FOMC meeting, the Fed states “The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.” The Fed did not set a target for the unemployment rate which is the other aspect of their dual mandate.
 
In the Fed’s first attempt at projecting the Fed Funds target rate, the Committee said this morning in their Official Statement that they expect it will be late 2014 before the first rate increase. In the Fed’s projection released this afternoon, they show that 3 members believe policy should be “firmed” in 2012, 3 believe it should first occur in 2013, 5 believe it should be in 2015, and 2 believe it should take place in 2016. Six of the 17 Fed officials believe the target rate will be unchanged at the end of 2014. The most hawkish estimate calls for the overnight rate to be at 1.0% by the end of 2012, 2.0% be the end of 2013, and 2.75% by the end of 2014.

Text of the full release here.
 
12/13/2011 -
Fed Keeps Rates Same
  
The FOMC left the overnight target rate at 0.00% to 0.25% again in its final 2011 meeting which took place today.  The Statement continues to note that “low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

There was no change to the Fed’s policy guidance as we expected would be the case.  There were no changes to “operation twist;” and, the Fed did not make any commentary on the likelihood of another round of quantitative easing.

The Fed made minor improvements to its economic assessment changing the wording of the Statement from “economic growth strengthened somewhat” to the “economy has been expanding moderately.”  They also upgraded their assessment of the labor market changing the wording from “continuing weakness” to “some improvement in overall labor market conditions.”

The Statement notes that inflation has ticked lower, saying “Inflation has moderated since earlier in the year and longer-term inflation expectations have remained stable.”

On the risk that Europe could affect the U.S. economy, the Statement notes that “Strains in the global financial markets continue to pose significant downside risks.”  Clearly this is a concern for the Fed as they have made clear in recent speeches.

Chicago Fed President Charles Evans dissented to the opinion, preferring “additional policy accommodation at this time.”

Bottom Line:  The December FOMC announcement contains no surprises.  The Fed did slightly upgrade its wording on how it describes the economic conditions but continues to warn that there are substantial challenges out there.  Going into the announcement, the 10-year Treasury was trading strongly

Text of the full release here.
 
11/02/2011 -
Fed Keeps Rates Same
  
Information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year. Nonetheless, recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has increased at a somewhat faster pace in recent months. Business investment in equipment and software has continued to expand, but investment in nonresidential structures is still weak, and the housing sector remains depressed. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Text of the full release here.

09/21/2011 -
Fed Announce "Operation Twist"
  
Noting the various headwinds facing the U.S. economy, the Committee voted to implement what has been dubbed as “operation twist,” the selling of shorter-dated securities and subsequent purchase of longer-maturity bonds. The program is designed to push down longer term yields to incentivize companies to borrow -- eventually leading to investment and job creation.
 
The Fed will be selling $400 billion in Treasuries with maturities shorter than 3 years and buying securities with maturities between 6 and 30 years. The program will last through June 2012. According to a separate release, the Fed says that 32% of their purchases will be in maturities from 6- to 8-years, 32% will be in maturities from 8- to 10-years, 4% will be in maturities from 10- to 20-years, and 29% will be in maturities from 20- to 30- years. This amounts to $116 billion in purchases in the longest bucket, something that was unexpected from the market prior to the announcement. The long bond is up over 3 points immediately following the release of the Statement to yield 3.05%.

The FOMC went further-than-expected by also announcing that they will begin reinvesting cashflow from their agency and agency MBS holdings into additional MBS securities, a surprise move that will be very supportive of the sector. Previously, the Fed was reinvesting cashflows into Treasuries. MBS spreads will likely tighten as a result, making it even harder for fixed income managers to find value in the sector.

Text of the full release here.
 
08/09/2011 -
Fed keeps rates stable, will keep rates low for an extended period - through 2013.
  
The FOMC voted to leave its benchmark overnight rate unchanged at 0.00% to 0.25% at their August 2011 meeting, significantly downgrading their economic assessment.  Moving to a more accommodative stance, the Committee added that they expect to hold rates “exceptionally low through at least mid 2013.”  Dissenting from the opinion on leaving rates low through 2013 were Kocherlakota, Fisher, and Plosser.  This is the first time since November 1992 that there were 3 dissenters.  There was much speculation as to if they would say something along the lines of rates staying low for a “really, really extended period.”  While there was not much doubt that the overnight rate would be unchanged through 2012, this confirms that.
 
The Fed acknowledged that downside risks to the economy have increased and that they have been surprised by how weak economic growth has been.  The Statement notes that "the Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability."
 
Since the FOMC’s last meeting, the S&P has fallen over 10%, the 10-year bond has dropped 62 basis points in yield, core inflation has risen to 1.6%, consumer sentiment has dropped 8 points, and the two jobs reports have resulted in 163k new payrolls combined.  Washington also squandered the opportunity to structurally reform the nation’s future fiscal path and S&P responded by downgrading U.S. long-term debt.  It is becoming apparent that fiscal stimulus is not palatable politically, nor will it be welcomed by the rating agencies.   
 
Immediately following the release, stocks whipsawed from up 100 to down 50 and then back up 50.  Bond prices rose with the 2-year Treasury yield dropping from 0.27% to 0.19%.  The 10-year Treasury yield dropped but then rose back to its pre-announcement 2.32%.
  
Text of the full release here.
 
06/23/2011 -
Fed keeps rates stable, says economy slowing a bit.
  
Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.
 
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
  
Text of the full release here.
 
04/27/2011 -
Fed keeps rates stable, says economic recovery is proceeding at a moderate pace.
  
Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.
 
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.  
  
Text of the full release here.
 
03/15/2011 -
Fed keeps rates stable, says economic recovery is "on firmer footing."
  
Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.  
  
Text of the full release here.
 
01/26/2011 -
Fed keeps rates stable, says economic recovery is continuing.
 
Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow. 
  
Text of the full release here.
 
12/14/2010 -
Fed keeps rates stable, says economic recovery is continuing.
 
Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
  
Text of the full release here.

11/3/2010 -
Fed keeps rates stable, announces new program to buy US Treasuries to keep long term rates down.
 
As expected, the Federal Reserve is spending $600 Billion as they try to jump-start growth and avoid deflation.  The move, referred to as quantitative easing or QE2, is designed to lower interest rates.  The reason it is called quantitative easing is because the fed cannot lower fed rates any lower than the 0 - 1/4 point range they are currently in.  This QE will bring down rates from another point of view than the traditional easing of the Fed Funds and Discount Rates.  The Fed made a similar move in 2009 to lower rates that was met with success, but not enough to restore solid economic growth.

This is unique territory for the Federal Reserve.  Right now banks are borrowing money at almost 0%, and lending it out at low rates for mortgages, auto loans, and commercial loans.  This move will put pressure on banks to lower the rates at which they lend money, and perhaps stimulate borrowing, and thus investment. 

Their quotes are below:

"Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.  Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."
 
Text of the full release here.

09/21/2010 -
Fed keeps rates stable, keeps buying US Treasuries to keep long term rates down.
 
The Federal Reserve met for the last time before the upcoming elections.  This time, they provided hints that they are closing to jumping in and doing more for the economy if needed by saying they are "prepared to provide additional accommodation."  Some of the more concerning data showing that the pace of home building would have to double to contribute much to the economy. 

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.
 
Text of the full release here.
 
08/10/2010 -
Fed keeps rates stable, buys US Treasuries to keep long term rates down.
 
The Fed’s FOMC Statement contains significant changes in verbiage and a moderate change in policy. In their statement, they acknowledge the weakening of the recovery and commit to measures intended to spur growth. They announce that they will maintain the size of the Fed’s balance sheet by reinvesting cashflows from their agency and MBS portfolios into “longer-term” Treasuries, and will continue to “roll over Treasury securities into other Treasuries as they mature.” Thomas Hoenig dropped his dissent of the “extended period” language. Now, however, he has voted against reinvesting the cashflows. Bottom line: This is a significant shift in Fed posture and reflects their new focus on re-catalyzing growth amid recent weakening data.

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
 
Text of the full release here.
 
06/23/2010 -
Fed keeps rates stable, says exceptionally low Fed Funds rates are here for an extended period.
 
Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
 
Text of the full release here.
 
04/28/2010 -
Fed keeps rates stable, says exceptionally low Fed Funds rates are here for an extended period.
 
Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

 In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.
 
Text of the full release here.

03/16/2010 -
Fed keeps rates stable, says exceptionally low Fed Funds rates are here for an extended period.
 
Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
 
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
 
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.  
 
Text of the full release here.
 

02/18/2010 -
Fed raises rate banks pay for emergency loans, the Discount Rate.
 
The Federal Reserve said on Thursday it was raising the interest rate it charges banks for emergency loans, its first rate move since December 2008, but insisted borrowing costs for consumers or companies would not rise.  The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds.

The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday. It left its benchmark interest rate unchanged near zero - at .25%.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement.  "Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
 
Text of the full release here.

02/18/2010 - Fed raises rate banks pay for emergency loans, the Discount Rate.
 
The Federal Reserve said on Thursday it was raising the interest rate it charges banks for emergency loans, its first rate move since December 2008, but insisted borrowing costs for consumers or companies would not rise.  The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds.

The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday. It left its benchmark interest rate unchanged near zero - at .25%.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement.  "Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
 
Text of the full release here.

01/27/2010 - Fed keeps rates stable.
 
Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
 
With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.
 
Text of the full release here.
 
12/16/2009 -
Fed keeps rates stable.
 
Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time..
 
Text of the full release here.

11/04/2009 - Fed keeps rates stable.
 
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
 
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
 
Text of the full release here.
 
09/23/2009 -
Fed keeps rates stable.
 
Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Federal Reserve also continues the programs purchasing agency mortgage backed securities and Treasury Securities as previously announced.

Text of the full release here.
 
08/12/2009 -
Fed keeps rates stable.
 
Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.
 
Text of the full release here.
 
06/24/2009 -
Fed keeps rates stable.
 
The Federal Reserve refrained from increasing its $1.75 trillion bond-purchase program, said the pace of economic contraction is slowing and predicted inflation will remain “subdued for some time.”
 
“Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington where it also kept the benchmark interest rate between zero and 0.25 percent. The rate will stay at “exceptionally low levels” for an “extended period.”
 
Chairman Ben S. Bernanke is watching to see how quickly the economy can recover from the deepest recession in five decades: Orders for durable goods unexpectedly rose in May, a government report showed today, while unemployment continues to climb. The Fed also wants to quell concerns that the $1 trillion expansion in its balance sheet will fuel inflation, pushing bond yields higher and crippling any rebound in the economy.
 
The Fed said “the pace of economic contraction is slowing” and noted “conditions in financial markets have generally improved.” The central bank added that it “is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

The Fed’s $300 billion Treasuries-purchase plan is scheduled to end in mid-September, according to the FOMC statement at the conclusion of the March 17-18 meeting, when it was announced. The Fed also committed to buy up to $1.45 trillion of housing debt this year. At its current rate, the Fed will reach the $300 billion of Treasuries by late August.
 
Text of the full release here.
 
04/29/2009 -
Fed keeps rates stable.
 
Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.
 
Text of the full release here.
 
01/28/2009 -
Fed keeps rates stable.
 
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.
 
Text of the full release here.

Click here to review fed rate changes since 1990. 

Click here to review prime rate changes.

 

The Federal Reserve met today to consider policy on short-term interest rates.  The Federal Reserve had cut two key short-term interest rates 11 times over the past few years to fight the recession. 

 

But they decided to raise the Discount rate during their February 2010 meeting, after keeping rates stable since December of 2008.  

The two short-term interest rates the Fed controls are the federal funds rate and the more symbolic discount rate.

The fed funds rate -- short for federal funds rate -- is the interest rate at which banks lend to each other overnight. The Fed sets this rate by buying or selling government securities until the target level is achieved. As such, it is a market interest rate.

The discount rate is the interest rate charged by a Federal Reserve Bank on short-term loans to depository institutions. The discount rate is important for two reasons: (1) it affects the cost of reserves borrowed from the Federal Reserve and (2) changes in the rate can be interpreted as an indicator of monetary policy.

 

These two rates do affect the economy and it's performance.  However, the rate cuts do take 4-6 months to work their way through the nation's economy.

Another rate influenced by, but not directly controlled by the Fed is Prime rate. This is the rate charged by commercial lenders on short-term loans to their lowest-risk, most creditworthy customers, such as large corporations. Often serves as a basis for rates on other loans.

 

Mortgages rates have been on the decline for the last few years - reaching their lowest levels in years.

 

The Fed's rate decisions affect mortgage rates setting the levels of 1 year adjustable rate mortgages and indirectly through the Fed's influence on longer-term rates that bond markets set.

 

We've had many people call us and ask - will mortgage rates go up when the Fed raises rates again?

 

The answer - it depends.    

 

Basically, short term rates are raised on the basis to slow economic growth and thus inflation.  If the rate cuts are successfully the economy begins to grow less rapidly, which decreases the demand for capital. As the demand for capital lessens, over time, the law of supply and demand ultimately pushes interest rates lower. 

Mortgage rates are often much longer-term financial instruments - not short term rates -  since mortgages can be over a term as long as 30 years.  But since most mortgages are paid off when people move or refinance and do not last 30 years, mortgage rates tend to closely follow the 10-year Bond yield.  The 10-year Bond yield is determined in the open market and do not always move in lockstep with short-term rates.  Fixed mortgage rates do not follow the variable short-term the fed funds or discount rate.   Shorter term ARMs usually do, but not the 15 and 30 year mortgages.

Long-term rates are sensitive to expectations about inflation. If short-term rates like the ones the Fed controls are going up, this is usually an indication that the economy is growing, and the increase in short term rates can discourage borrowing and spending, which can actually cause inflation to decrease. Long-term rates, such as mortgage rates, often fall when concerns about inflation decrease, but long term rates rise when there are concerns about too much economic growth and inflation.
  
The short term rates the Fed controls, and the long term bonds that affect mortgage rates, have a basic opposing effect.
 
Basically, short term rates are increased on the basis to decrease economic growth and prevent inflation.
 
Once rates are increased enough to decrease spending, economic growth decreases, inflation risk decreases, and three things happen to decrease long term bond rates, and thus mortgage rates. 

1) Businesses: Higher interest rates make it more difficult for businesses to get loans to expand. Unemployment tends to rise, which eases wage inflation, although at a human cost.  Demand for capital decreases, lowering the interest rate through the laws of supply and demand.

2) Markets: Higher interest rates tend to attract investment into bonds and other fixed-income investments, pushing down stock prices.  Investors pull out of the stock market and push into the bond market to seek safer yields. This increases the price on the bond, thus lowering the rates.  If they see the Fed not acting aggressively enough, then they do the opposite, raising rates

3) Consumers: Higher interest rates on credit cards and mortgages can cool consumer spending, which accounts for about two-thirds of economic activity.  Since there is less risk of inflation in the future since economic growth is not occurring as fast, the bond yield can be lower since it is safer than the stock market, and there is no risk of inflation overwhelming this return. 
 
Since the bond and stock market and Real Estate make up the majority of wealth in our country, when inflation rises to much, spending reduces, and once again the cycle starts again.

Early the cycle of rate increases, it's hard to tell if the market will view the fed as acting too slow, or too aggressively.

So it is a constant battle for the Fed between fighting inflation and economic growth.  The Fed tries to balance the equation so long term rates and inflation is low, and the economy growing at a solid pace.

This is exactly what happened before the recent fed meeting about the fed funds rate. Mortgage rates actually rose because of inflation concerns. Housing financial markets often are ahead of the Fed. Mortgage interest rates are determined every day in active public markets. If those markets believe the economy is growing too fast and causing inflation, and the market is concerned that the Fed is not acting fast enough to raise rates and control inflation, interest rates may increase as the markets anticipate inflation.
  
It’s almost impossible to accurately predict the future of something as complex as the U.S. economy. However, it is important that mortgage consumers understand some of the market dynamics. A lack of understanding can cost them money.

 

As bond prices rise, the yield, or effective interest rate, drops.  If bond prices are going down  (which means the yield or interest rate is going up) that is generally a sign that higher mortgage rates are ahead. A weak bond market will usually (but not always) cause mortgage rates to rise. (see also Bond Prices and Bond yields)

 

Bond yields (rates) are usually high during a strong economy where there is inflation risk, and lower when there is little inflation risk. 

 

The bond yield had been on the rise for the last several months, as the bond market feels that the economy is in good shape and growing at a steady and possibly inflationary pace.  For today's announcement, rates were down slightly.

 

Many anticipate that long term mortgage rates will fall if the Fed's action spark a decline in the stock market by slowing the economy, which will cause money to flow out of stocks and into bonds.  This would cause bond yields to lower, which causes long term mortgage rates to go down.  Adjustable Rate Mortgage (ARM) rates will go up.

 

There is a bright side to this picture. The increase in short term rates is a sign the economy is in good shape, and the increases now will keep long-term rates lower over time by preventing inflation.  

 

Consumers might want to consider an interest only payment mortgage instead of a 30 year fixed - even some of these products have a 30 year fixed rate.  Or locking in a lower mortgage rate for three or five years could make sense because most people do not stay in a home more than five years, and those who do could refinance later.

 

What's next?  Depends on if the bond market feels the economy is better than the fed thinks it is - or if the fed is too slow to raise the short term rates again.  If the economy slows, bond rates will fall.  For now, bond rates and mortgage rates are moving higher, the question is how much and for how long?  

 

Rates will rise for home equity lines if the fed increases rates.  Those are based on prime, and if banks increase prime rate from 3.25% - home equity lines and second mortgage rates will be higher.  

Also, rates for people with challenged credit will slowly fall, as the economy is improving and this is lowering the risk in an economic growth cycle.

 

The overall result - rates are still very low - it's a great time to refinance or buy a home.

 

Want more information on exactly how the fed rates changes affect the economy?

Click here for more details on effects of rate increases.
Click here for more details on effects of rate decreases.

Click here for all goodmortgage.com News

Click here to learn more in goodmortgage.com Mortgage School


Click here to apply online.