The Federal Reserve kicked off its new strategy of clearer communications at the close of January’s Open Market Committee meeting last Wednesday afternoon. With just a few words, plus some charts (page 3), the Fed now expects to keep interest rates “extraordinarily low” for a period up to 18 months longer than the mid-2013 estimate previously in place. Also for the first time, the Fed officially revealed more explicitly that it will use an inflation target to help control monetary policy.

The Fed’s influence on mortgage rates

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Mortgage rates are coming to a crossroads of sorts — will they rise or taper off moving forward? While their pending direction isn’t quite a coin flip, opposing market forces — which are coming to a head — could draw mortgage rates in either direction, explains the latest issue of HSH.com’s Market Trends Newsletter.

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While it may seem like the Fed’s decision to raise the Discount Rate by a quarter percentage point (0.25%) came out of nowhere, the Central Bank had been planning the move for weeks. Regardless of when the decision was made, mortgage rates nudged higher after the information was released:

The overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI rose by five basis points (.05%), ending HSH.com’s survey week at 5.41%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The FRMI’s Hybrid 5/1 ARM counterpart moved a lone tick higher (.01%), during the latest survey cycle, landing at 4.58%. The all-important 30-year conforming fixed rate ticked just two basis points higher for the week. Read the rest of this entry »

The perfect companion to zero-percent financing — zero-percent savings:

The U.S. Treasury Department set a zero percent earnings rate Friday for its Series I savings bonds bought from May through October 2009.

The earnings rate includes a fixed rate, set at 0.1%, and the annualized rate of inflation over the next six months, which was -5.56% between September 2008 and March 2009. The earnings rate is never less than zero.

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Conditions Improving

The tone of the statement following the Federal Open Market Committee’s (FOMC) April 28-29 meeting is, if anything, less pessimistic than it has been in previous months. Despite the economy’s continued decline, the “pace of contraction appears to be somewhat slower,” reported the committee.

As has been the case with these meetings since the end of last year, the rate cut (or lack thereof) has no longer been the top story. Rather, it has been the implementation or expansion of new Federal initiatives designed to improve market conditions. The fact that no new or expanding program has been announced, signals that conditions have improved enough that additional government intervention is not warranted at least at the moment.

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Last week we asked whether you thought it was a good or bad idea if the Fed conducted regular press conferences to keep taxpayers abreast to their latest strategies and ideas. Author Andy Kessler seems to think it’s a smart idea — especially when it comes to the Fed’s upcoming battle with inflation (emphasis added):

My suggestion: Lay out a blueprint for pulling the money back in. Tell Wall Street and Main Street exactly what you are going to do, and when and how your plan will be triggered. When economic activity rises by 2 percent, you are going to increase interest rates by 1 percent and “retire” another $500 billion. That will stop second guessing and congressional quibbling. And I’d get it out quickly, this summer.

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Luke Mullins of U.S. News & World Report has documented four causes and effects of mortgage rates dropping to near 5%.

What factors have allowed mortgage rates to fall to levels unseen in decades? “Uncle Sam is behind the dive,” writes Mullins. Decreased inflation, lower yields on 10-year Treasuries, and, most importantly, the government’s commitment to purchase $600 billion in Fannie and Freddie debt and mortgage-backed securities, have all influenced the decline.

How long can we expect this current mortgage market to last? “There is no reason to think that rates are going to go up so substantially so as to erode the marketplace,” says HSH’s Keith Gumbinger. Mullins expects that rates “should remain attractive for the rest of the year.”

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The Consumer Price Index (CPI) exceeded analysts’ expectations dropping 1% in October. Core CPI, which excludes the volatile costs of food and energy, fell by 0.1%. The stark drop in food and energy prices, combined with an economy in slow motion, has forced the price of goods lower.

When we reported yesterday on the third-consecutive monthly drop in the Producer Price Index (PPI), we said “Cheaper costs in the coming months should begin to lower the Consumer Price Index (CPI ), a measurement of cost on the consumer’s end.” We were right — the natural lag between production and purchase explains why the PPI has dropped three months in a row, while the CPI has only experienced its first.

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The Producer Price Index (PPI), a measurement of costs at the production level, dropped for the third month in a row, to a record-monthly decline of 2.8% in October. The drop is largely explained by the steady decline in food and energy prices over the last few months:

Producer prices for energy products are now beginning to reflect the recent declines in energy costs. Large declines were seen in prices for petroleum products, particularly gasoline and diesel fuel.

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The recent reprieve in gas prices have gotten a lot of people thinking “why haven’t other prices dropped as well?” Well, there are a couple of answers, none of which will offer any immediate satisfaction. When it comes to falling prices, a key word is “waiting.”

As we’ve mentioned before on this blog, prices seem to rise faster then they fall. While it seems a price increase can be felt overnight, a decrease might take months. Everyone from farmers to airlines purchase commodities in the features market. They may lock in a price and agree to pay that price for a given set of time; for example farmers may sign contracts to purchase fertilizer (which has been extremely expensive) well into next year.

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