blog.hsh.com

For months now, the hype surrounding the conclusion of the Federal Open Market Committee’s (FOMC) two-day meetings has been far less about a possible change to the Federal funds rates, than it has been about the short statement that follows.

Today’s conclusion certainly continues that trend. While we weren’t expecting much of a change in the FOMC’s statement from their September release, we were in fact keeping our eyes peeled for any subtle changes to how the Fed addressed economic conditions. Their stance that the current climate is “likely to warrant exceptionally low levels of the federal funds rate for an extended period” remained unchanged, and the target for the Fed funds rate remains between 0 and 1/4 percent.

Despite a week filled with inconsistent economic data, mortgage rates managed to fall last week to spring-time levels. According to the latest issue of HSH’s Market Trends Newsletter, “Rates Leg Down a Little,” 30-year conforming rates dropped to their “their lowest average rate since the late March to late May period.”

“With September now behind us, stock markets started October in a fashion similar to other Octobers: they sold off to some degree. After a pretty good third quarter’s profits were booked, at least some of those gains from equity sales have been stashed back into Treasuries, driving yields down. This is turn is pressuring mortgage rates down to the lows of earlier this year.”

The Fed has some important decisions to make before year’s end — like whether or not to purchase more than $1.25 trillion in mortgage-backed securities (MBS).

Today, as the Federal Open Market Committee (FOMC) begins day one of their two-day meeting, analysts are expecting that, when the FOMC meeting concludes tomorrow, the Central Bank will keep the target for the Fed funds rate between 0% and 0.25%, and that the Fed will likely phase out their MBS program by December as previously planned.

But what will happen to mortgage rates when this program comes to a close? Since the MBS purchase program began, the Fed has bought some 80% of the mortgages sold in this country, the Wall Street Journal estimates. How badly will affordability be affected if there is no longer a strategy in place to keep rates subdued?

According to the latest issue of HSH’s Market Trends Newsletter, “Markets Feeling Good, For Now,” the improving economy should bring higher rates along with it, but as of now, that hasn’t happened.

“While the sun’s not nearly out yet, the economic sky seems to continue to brighten. Usually, that would start to foster somewhat higher interest rates — but apparently, not yet.”

According to the latest issue of HSH’s Market Trends Newsletter, mortgage rates haven’t fluctuated substantially because of the economy’s inconsistent outlook. “As has been the case over the past few weeks, mortgage rates appear poised to rise on the back of firming economic data, only to have the pressure let out of them by a less-stellar outlook. That’s generally left [mortgage rates] at about the same levels now since early July.”

“[Last] week was no exception. A fair rise in Treasury yields at the end of the week [8-7-09] left us with the impression that we’d see a bit of an upward bias to rates [last] week, at least more than the one basis point tick in HSH’s Fixed-Rate Mortgage Indicator. The FRMI nudged just that lone basis point higher to close [last] week at 5.73%, an average barely any different than those seen since Independence Day passed. The FRMI’s counterpart for hybrid 5/1 ARMs lost six basis points, landing at an average 5.04%. Conforming 30-year FRMs started the week at 5.51% on Monday, but ended it at 5.35% on Friday, still well within the mid-portion of a broad range defined back in late May and early June.”

Improving economic data sent mortgage rates rising toward week’s end. Interestingly, the latest issue of HSH’s Market Trends Newsletter, “Better Data Equals Higher Rates — Maybe,” questions whether our improving economy will continue to put upward pressure on rates.

“One thought did occur to us this week beyond the conventional wisdom. It’s a given that an improving economy will of course drive interest rates higher, as demand for credit and prospects for inflation increase. Usually, this has a corresponding effect on mortgage rates (particularly fixed-rate mortgage rates). With so many of the troubles in housing and mortgage financing so evident over the past couple of years, and the risks of making loans so clear and persistent, we’re left to wonder:”

Our prediction for the future of mortgage rates as well as our interpretation of the minutes from the Federal Open Market Committee’s (FOMC) last meeting were confirmed yesterday in a speech delivered by an FOMC member.

Federal Reserve Bank of Atlanta President Dennis Lockhart, also a voting member of the FOMC, said “Certainly we have low interest rates today” and “I would expect that to continue for some time.”

According to the latest issue of HSH’s Market Trends Newsletter, “Rate Fall, then Firm,” the Fed’s sponge-like actions, absorbing the excess supply of mortgage-backed securities and Treasuries when and if it forms, has served to keep interest rates low.

“The Fed is providing support to various financial markets, including the mortgage market, with purchases of MBS and Treasury debt alike. Earlier this year, there were rumors pervading the markets that the Fed would engineer 4.5% 30-year fixed-rate mortgages; we never put any stock in them. With the release of the minutes, they revealed for the first time that there is no specific target for rates in mind, but rather the Fed seems to be acting as a sponge to absorb excess supply in those markets when and if it forms, serving to keep interest rates low. The minutes noted that ‘The asset purchase programs were intended to support economic activity by improving market functioning and reducing interest rates on mortgage loans and other long-term credit to households and businesses relative to what they otherwise would have been. But the Committee had not set specific objectives for longer-term interest rates…’. At the same time, they also revealed a steadfast hold to the objective of the established program of measured buying of these assets, and that there would be no knee-jerk adjustments to try to address short-term fluctuations in market interest rates.”

The Federal Open Market Committee (FOMC) released the minutes from their June 23-24 meeting yesterday. While the FOMC does release an initial statement immediately following their meeting, the minutes, released several weeks later, provide analysts and market observers with more detailed information to the discussions as well as the decisions made during their last meeting.

Since November the Fed has run a program to buy up to $1.25 trillion in Fannie Mae and Freddie Mac mortgage-backed securities (MBS) in order to keep conforming mortgage rates low. The FOMC’s minutes definitively indicate that the Fed will remain on track to purchase their total by year’s end.

At the end of business on Monday the Conforming 30-year fixed rate was 5.22%, the lowest daily average since May 27. Tuesday’s rate ended at 5.28%, according to HSH.com.

Click here to read our prediction of where the Conforming rate is headed for the rest of the year.