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Should I Lock or Float? FED Minutes Reveal Rates Should Climb Before Years End

11 Jul

Federal Reserve to Meet this weekFOMC Minutes Suggest QE Tapering by Year-End

Ben Bernanke, Fed Chairman, blew up the bond and mortgage markets a month ago with his comments that the Fed is preparing to begin reducing the monthly purchases of treasuries and mortgage-backed securities. Rates spiked, and left folks shopping for mortgages, shaking their heads. The minutes for June’s meeting of the Federal Open Market Committee (FOMC) suggest that committee members are mostly in agreement that the current quantitative easing program (QE) should begin winding down by year-end, but the committee minutes are very clear about the committee’s intention to monitor inflation and ongoing economic and financial developments before taking action to reduce the current rate of QE.

Today, rates have rallied a bit after starting the day up, and now trending better (MBS now +34 basis points as of 11 am pacific time). This may point to Bernanke’s comments late yesterday, “highly accommodative monetary policy for the foreseeable future is what’s needed”. I think it is safe to say, Bernanke was shocked at the swift and deep market response to his comments and is now backtracking a bit. The minutes showed officials would want to see more signs of job growth before starting to scale back their $85B-a-month bond purchases.

The Fed currently purchases $85 billion monthly in Treasury securities and mortgage-backed securities (MBS). Investors fear that if the Fed rolls back QE too soon or too fast, it could cause long-term interest rates such as mortgage rates to rise faster.

The Fed minutes indicate that factors the Fed will continue monitoring before making changes to QE include:

  • Labor market conditions
  • Indicators of inflationary pressures
  • Readings on financial developments

FOMC members also agreed that the Fed would not sell MBS it has accumulated after the economic support program ceases. When the Fed ceases QE, demand for mortgage-backed securities is expected to fall. If the Fed were to sell off MBS holdings in addition to stopping QE, MBS prices could fall sharply. In general, when MBS prices fall, mortgage rates rise.

The FOMC minutes indicate that the Fed intends to maintain the Federal Funds rate at 0.000 to 0.250 percent “for a considerable time after the monthly asset purchases cease.”  To be clear, the minutes do not reveal any specific dates for starting to wind down the program.

Concerns over financial conditions in Europe highlight the Fed’s intention to monitor global economic developments were discussed. Potential “spillover” of negative sentiments in response to Europe’s economic woes to U.S. financial markets were seen as a potential threat to the U.S. economic recovery.

Committee members found that although the economy showed moderate improvement since its last meeting, the national unemployment rate remains high at 7.60 percent. Members also noted that the numbers of long-term unemployed and those working part-time jobs but wanting full-time jobs remain higher than average. These conditions traditionally keep consumers from buying homes.

Housing: Upside-Down Mortgages Decreasing

Due to rapid increases in home values in Sacramento and the rest of the country, the committee noted that fewer homeowners were under water on their mortgage loans. This is good news as homeowners can rebuild household wealth as their home equity increases. Having home equity also provides homeowners with the flexibility to sell or refinance their homes.

While housing is driving the economic recovery, high unemployment will likely keep the Fed from changing its QE policy in the short-term.

Now may be a very good time to take advantage of still historically low mortgage interest rates before they rise. If you have specific questions on purchasing or refinancing your home mortgage loan and how these changes may affect you, please contact your trusted mortgage professional today.

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Posted by on July 11, 2013 in Federal Reserve

 

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