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Rate Update and the FOMC

After a busy week of economic news, there was little change to mortgage rates. As expected, the Fed made no change in the fed funds rate, and their statement essentially followed the expected script. Demand for the Treasury auctions was very strong, with indirect bidders gobbling up approximately 50% of the $118 billion of 2, 5 and 7-year notes. Ben Bernanke was reconfirmed as Fed Chairman by the Senate for a second four-year term by a 70-30 vote, the weakest endorsement ever in the central bank’s 96-year history. Much of the economic data released during the week exceeded expectations, highlighted by a 5.7% increase in Gross Domestic Product (GDP) for the fourth quarter. Currently, the 30-Year Fixed sits at 4.625% (4.804% APR) and the 15-Year Fixed is at 4.000% (4.307% APR). The big news next week will undoubtedly be the important employment report on Friday.

The Federal Open Market Committee (FOMC) is responsible for open market operations, which influence “the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate.” The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The FOMC does not set mortgage rates, but changes in the federal funds rate often affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and mortgage rates. The FOMC meets eight times per year where it reviews “economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.” The FOMC consists of twelve members – the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

During the current economic downturn, the FOMC has taken an exceptional role to support the battered real estate and mortgage markets with their $1.25 billion allocation to purchase mortgage-backed securities (MBS). In addition to last week’s rate announcement, the FOMC offered additional insight regarding future policy. The biggest surprise was that there was one dissenter from the Fed’s decision to keep the fed funds rate unchanged, as he believes economic conditions have improved enough that the Fed should begin to tighten policy. The statement also repeated that the MBS purchase program will be concluded by the end of March, fostering a wide range of expectations about the impact of this change. The Fed has been purchasing roughly 75% of the new MBS issuance, and a decline from one source normally leads to higher yields to attract other buyers. Some argue that the end of the program has been expected for a while, so mortgage rates already reflect the news. Others believe this could lead to an increase in mortgage rates of as much as one percent.

Central Coast Lending, Inc.
(805) 439-2300

Written by Keith Byrd - Go to Keith's Website/Profile