In late-December, the Federal Open Market Committee decided that U.S. employment numbers were strong enough to begin reducing the U.S. central bank’s involvement in the economy.
Did the FOMC and Federal Reserve Chairman Ben Bernanke act too soon?
After strong back-to-back employment numbers in October (+200,000 jobs) and November (+241,000 jobs), payrolls added just 74,000 jobs in December. Economists had expected to see job growth near 200,000 for the month.
The unemployment rate ticked down to 6.7% from the prior figure of 7.0%, but this dip is primarily due to 347,000 workers leaving the workforce.
The headline unemployment figure is limited by its inputs. A broader measure of unemployment called the “U6” accounts for workers who are discouraged, underemployed, and unemployed in an attempt to get a more succinct employment picture. In December, that U6 measure of unemployment dipped to 13.1%.
December’s employment-to-population ratio was 58.6%.
After the employment report was released, mortgage rates immediately dipped. According to loan officer and blogger Dan Green, pricing for conventional mortgage rates “improved close to 45 basis points; and pricing for FHA and VA mortgages improved approximately 35 basis points.” One hundred basis points is equal to 1%.
Rates fell as investors modified their expectations for Federal Reserve action.
The FOMC enacted “tapering”, or reduction, of the Fed’s quantitative easing (QE) stimulus program in December, dropping bond purchases by $10 billion per month from $85 billion to $75 billion.
Bernanke had long said that the Fed would peg stimulus action to employment numbers. Positive employment growth to the end of 2013 seemed to back up the FOMC’s decision.
Incoming chairman Janet Yellen will relieve Bernanke on February 1. With December’s poor data, she will face the decision to resume tapering in the coming months, or hold the Fed’s purchases as they currently stand. Much will depend on future data releases.
The Fed has been able to put downward pressure on mortgage rates with its QE program. Less QE will result in higher mortgage rates. If “tapering” is put on hold due to poor economic data, mortgage rates will likely hold near current levels, and perhaps dip a bit lower.
Give us a call at 805.543.LOAN to see how the latest dip in rates might affect your finances and real estate purchasing power.