The Federal Reserve’s statement after yesterday’s Federal Open Market Committee (FOMC) meeting left no doubt as to the Fed’s dual commitment to keeping long-term interest rates down and encouraging economic growth. But there were a few subtle changes to the Fed’s current bond-buying program made during today’s FOMC meeting.
The Fed buying bonds and Mortgage Backed Securities (MBS) works by boosting bond prices, which typically helps with keeping mortgage rates lower. Instead of the Fed’s monthly purchase of $85 billion in bonds and MBS per month, they will now make the call if they want to reduce these purchases, depending how well the economy is performing. Instead of turning this quantitative easing (QE) OFF or ON, they can use the concept of a “dimmer” switch instead.
By introducing this “dimmer” concept, it sends a message to the markets that their exit from these purchases, when it occurs, will be gentle and measured. The Fed reaffirmed its position that it will not withdraw or cut monetary easing until the unemployment rate is substantially lower.
Unemployment Rate Improving Nationally
Fed predictions for the national unemployment rate improved; December’s outlook for 2013 estimated the unemployment rate at between 7.4 to 7.7 percent; the Fed now expects unemployment rates of 7.3 to 7.5 percent by the end of this year.
The Fed notes that while employment rates are improving, they remain elevated, which supports the Fed’s decision not to change its bond purchase program in the near term.
Lower unemployment rates suggest that more people will be financially ready to buy homes or refinance their existing mortgage loans, and the unemployment rate is also expected to fall due to growing numbers of baby boomers leaving the workforce. But here is the conundrum – On a year-over-year basis, inventory of homes for sale has dropped 19%. Less inventory means higher demand, which means values are going up! We may have more consumers able to buy homes, but will they be able to compete for that new home among the many others vying for that property. What does this mean to new homebuyers? Click here.
Lower Inflation Rates Boost Consumer Purchasing Power
The Fed predicts economic growth to range between 2.3 and 2.8 percent in 2013, but negative influences including a higher payroll tax and government spending cuts are expected to slow the rate of economic growth – aka the sequester!
Concerning inflation, the Fed expects an inflation rate of between 1.3 and 1.7 percent this year and for inflation to stay below 2 percent through 2015. Lower inflation rates allow consumers more discretionary spending power, which can further boost the economy and improve consumer confidence in making big-ticket purchases including homes and related items and services in California and around the country.
Fed Keeping Tabs On European Economic Issues
Fed officers are continuing to monitor economic developments in Europe, and expressed concerns that the situation remains fragile.
Its plan to keep short-term interest rates near zero until unemployment rates reach 6.5 percent or the inflation rate exceeds 2.5 percent further support the Fed’s plan to keep its monetary easing policy intact for the near term. Don’t let this fool you or give you a false sense of ease that rates where they are. Yes, these moves are pushing a lid on rates increasing too fast. Most experts believe rates are on an upward trajectory in the near term and into the future.
Unless unexpected or catastrophic events occur which would cause sudden or rapid economic changes, the Fed appears unlikely to announce major changes in its policy.