It's Not Easy Managing Green (the Money Supply, Interest Rates, Inflation...)

Big Ben

As mentioned in this article from New York Times (a source seldom quoted by this blogger), Ben Bernanke's Fed Panel Is Divided on Direction.  Seems "too little too late" is the new "too much too soon" when it comes to his attempts to "manage" interest rates and inflation.

Granted, it's a thankless job.  But monetary theory, the antithesis to Keynesian economics (whose theories the current administration has conclusively disproved), tells us that these economic factors are the results of supply and demand.  These may be positively influenced by communicating clear policies and sticking to them.  Ultimately, however, they are set by the market, meaning that attempts to manage them require market intervention, which tends to be costly and short lived. - David

No Help For Housing In Bernanke's Operation Twist

Tough times in housing include the reduced effectiveness of the Fed's tools to enhance the housing market.  As discussed in this Forbes article, the Fed's attempt to flatten ("twist") the yield curve (attempting to reduce long term rates by shifting its holdings from shorter to longer term Treasuries) can't can't help the housing market unless buyers are willing and able overcome uncertainty and pull the trigger.

A Simple Explanation Of The Federal Reserve Statement (August 9, 2011 Edition)

Tuesday, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

The vote was 7-3 — the first time in 5 meetings that the nation's Central Bank was non-unanimous and the first time since 1992 that the FOMC adjourned with as many as three dissenters.

In its press release, the FOMC had little good to say about the U.S. economy, noting that since its last meeting in July:

1. Growth has been "considerably slower" than expected
2. Labor market conditions have deteriorated
3. Household spendng has "flattened"

The Fed also noted that the housing sector remains depressed.

On the positive side, the Fed said that business investment in equipment and software continues to expand, and that energy costs have dropped and no longer contribute to inflationary pressures on the economy.

In fact, the Fed worries that inflation may be running too low for the country's good.

To that end, the Federal Reserve has pledged to keep the Fed Funds Rate in its current range near 0.000 percent "at least until mid-2013". This is a departure from prior statements in which the Fed gave no such date.

Mortgage market reaction to the FOMC statement has been positive this afternoon. Mortgage rates in California are improving, but note that sentiment can shift quickly -- especially in a market as uncertain as this one.

If today's mortgage rates look good in your household budget, consider locking in a rate.

The FOMC's next scheduled meeting is September 20, 2011.

What's Ahead For Mortgage Rates This Week : June 13, 2011

Mortgage markets moved in feverish fashion last week, changing with extreme frequency, and eventually ending slightly worse on the week. Conforming mortgage rates fell to a 6-month low Wednesday but, by Friday, they had retreated higher.
Last week marked just the second time in 8 weeks that rates increased. During that span, Freddie Mac reports that mortgage rates have dropped 42 basis points, or 0.42%.
That equates to a monthly savings of $25.24 per $100,000 borrowed.
One reason why mortgage rates have been dropping is that the economy is growing more slowly than projected. In a speech last week, Federal Reserve Chairman Ben Bernanke described the U.S. recovery as "frustratingly slow". In a separate speech, another Federal Reserve President, William Dudley, categorized the recovery as "subpar".
Economic weakness tends to promote a low mortgage rate environment as equity markets sell off and investors seek safety of principal. Indeed, the Dow Jones Industrial Average fell for the 6th straight week, its longest losing streak since 2002.
Mortgage rates were also helped by ongoing uncertainty in Greece. The nation remains at-risk for default, and that's spurring a bond market to flight-to-quality which benefits the U.S. mortgage market, too.
This week, mortgage rates may reverse their recent slide. There isn't much data due for release, but the numbers that will hit the wires have the ability to move markets -- especially the inflation-linked figures.

• Tuesday : Producer Price Index, Retail Sales
• Wednesday : Consumer Price Index
• Thursday : Housing Starts
• Friday : Consumer Sentiment

If you've been looking at mortgage rates for a purchase or refinance, now may be a good time to lock. FHA and conforming rates are at their lowest levels since December 2010.
Going forward, rates have much more room to rise than to fall.

A Simple Explanation Of The Federal Reserve Statement (April 27, 2011 Edition)

Earlier today, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

The vote was 10-0 -- the third straight meeting after which the FOMC vote was unanimous.

In its press release, the FOMC noted that since its March 2011 meeting, the economic recovery is proceeding "at a moderate pace" and that labor markets conditions are "improving gradually". Household spending and business investment "continue[s] to expand" but the housing sector remains "depressed".

Furthermore, the FOMC's statement discussed the Federal Reserve's dual mandate of (1) Managing inflation levels, and (2) Fostering maximum employment. The statement acknowledged recent inflation pressures on the economy, but it expects those pressures -- because they're related to oil and food prices -- to be "transitory". Unemployment remains "elevated".

The FOMC statement also re-affirms the group's plan to keep the Fed Funds Rate near zero percent "for an extended period" of time, and to keep its $600 billion bond market support package -- more commonly called "QE2" -- intact.

The statement's verbiage suggests that a third support package may be created after QE2 ends in June 2011, depending on the needs of the economy.

Mortgage market reaction to the FOMC statement has been positive thus far. Mortgage rates are unchanged, but leaning lower. And, as always, market sentiment could shift quickly. If you like today's mortgage rates, consider locking in.

The FOMC's next scheduled meeting is a 2-day event, June 20-21 2011.

Mortgage Rates -- And Home Affordability -- At The Whim Of The Federal Reserve

The Federal Open Market Committee starts a two-day meeting today, the third of its 8 scheduled meetings this year.

The FOMC is a special, 12-person committee within the Federal Reserve. It's led by Fed Chairman Ben Bernanke and the group is responsible for voting on our nation's monetary policy. This includes setting the Fed Funds Rate, the rate at which banks borrow money from each other overnight.

The general public tends to confuse the Fed Funds Rate for "mortgage rates" but, as shown in the chart at top, the two interest rates are very different. There is no direct correlation between the Fed Funds Rate and everyday mortgage rates.

Since 1990, the two benchmark rates have been separated by as much as 5.29 percent, and have been as close as 0.52 percent.

Today, the separation between the Fed Funds Rate and the national average for a standard, 30-year fixed rate mortgage is 4.625 percent. This spread will widen -- or shrink -- beginning 12:30 PM ET Wednesday. That's when the FOMC adjourns and releases its public statement to the markets.

According to Wall Street, there's a 100% chance that the FOMC leaves the Fed Funds Rate in its current "target range" of 0.000-0.250 percent, the same range in which it's been since December 2008. Depending on the verbiage in the press release, plus the comments of Fed Chairman Ben Bernanke in his scheduled, 2:15 PM ET press briefing, mortgage rates aren't expected to steady as well.

If the Fed projects higher growth in late-2011/early-2012, or hints at new market stimuli, expect mortgage rates to rise on concerns about inflation. Inflation is bad for mortgage rates, in general.

On the other hand, if the Fed indicates that the economy is slowing down, or that it plans to withdraw its existing, $600 billion bond market stimulus, look for mortgage rates to fall.

It's hard to be a home buyer in the the Beach Cities area when the Federal Open Market Committee meets. There's just so much that can change mortgage rates and rising mortgage rates can affect purchasing power in a flash.

In the 6 months since November 2010, home affordability is off 9%.

So, if you're shopping for mortgages, or just floating a rate, consider getting locked in before the FOMC issues its press release Wednesday. Once the statement hits, mortgage rates could soar.

What's Ahead For Mortgage Rates This Week : April 25, 2011

Mortgage markets improved slightly through last week's holiday-shortened trading sessions. Better-than-expected housing data led mortgage rates higher Tuesday and Wednesday, but rates retreated Thursday morning in advance of Good Friday.

Markets were closed Thursday afternoon and Friday. They re-open this morning.

Conforming mortgage rates in California ended last week unchanged overall. It's a strange outcome considering that Standard & Poor's issued a downgrade on U.S. debt Monday.

In most instances, a debt downgrade would lead investors away from a particular group of securities -- in this case, a group that includes mortgage-backed bonds. However, Wall Street reacted in the opposite.

When S&P issued its opinion, however, mortgage bonds rallied.

Some say this is because the downgrade will force Congress to address a rising debt-load; others think a downgrade slows growth which, in turn, slows down inflation. Both scenarios are considered a positive for mortgage bonds. Hence, mortgage rates fell.

This week, momentum could reverse. In addition to a slew of housing and economic data including New Home Sales, Pending Home Sales, and Consumer Confidence data, the Federal Open Market Committee is meeting for the third time this year. And this month, the FOMC is meeting a little differently.

Usually, when the FOMC gets together, it adjourns and releases a press statement to the markets at 2:15 PM ET. This month, though, the FOMC will release its statement at 12:30 PM ET, and then Fed Chairman Ben Bernanke will hold a press briefing at 2:15 PM ET to address the aforementioned statement. He's expected to add growth forecasts to the official FOMC release, among other items.

Whenever the FOMC meets, mortgage rates can be volatile. This week, with the new press briefing format, that volatility is even more likely.

If you're floating a mortgage rate or wondering whether to lock, mortgage rates will be at their "calmest" levels of the week Monday and Tuesday. Once Wednesday hits, and the FOMC statements begin, expect for rates to change.

 

A Simple Explanation Of The Federal Reserve Statement (March 15, 2011 Edition)

Today, for the second straight meeting, the Federal Open Market Committee voted unanimously to leave the Fed Funds Rate unchanged within its target range of 0.000-0.250 percent.

The vote was 10-0.

In its press release, the FOMC noted that since its January 2011 meeting, the economic recovery "is on firming footing", and that the labor markets are "improving gradually". In addition, household spending "continues to expand". Nonetheless, the Fed said, the economy remains constrained by rising commodity prices and the "depressed" housing sector.

The FOMC statement also re-affirms the group's plan to keep the Fed Funds Rate near zero percent "for an extended period", and to keep its $600 billion bond market support package -- more commonly called "QE2" -- intact.

And, lastly, for the third straight time, the Federal Open Market Committee's post-meeting release statement included a paragraph detailing the Federal Reserve's dual mandate of managing inflation levels, and fostering maximum employment. Although it acknowledged inflationary pressures on the economy, the Fed said inflation remains too low for the economy currently, and that unemployment remains "elevated". 

In time, the Fed expects both measurements to improve.

Mortgage market reaction to the FOMC has been negative since the statement's release. Mortgage rates are unchanged, but poised to worsen.

The FOMC's next scheduled meeting is a 1-day event, March 15, 2011.

Your Mortgage Rate Strategy For Today's FOMC Meeting

The Federal Open Market Committee meets today in Washington D.C. The FOMC is a special group within the Federal Reserve, led by Fed Chairman Ben Bernanke, and consisting of 12 members.

The FOMC's official schedule calls for 8 meetings annually at which it reviews the nation's economic and financial conditions, and chooses whether to change existing monetary policy.

The group's last rendez-vous was a 2-day affair, January 25-26, 2011.

Today's FOMC meeting represents a bona fide risk to home buyers and rate shoppers across the country. This is because when the Fed meets, Wall Street gets nervous which, in turn, causes mortgage rates to get volatile. And, as mortgage rates go, so goes home affordability. 

Rate shoppers learned this the hard way after the FOMC's last meeting.

In January, Wall Street deemed the Fed's status quo message too soft on the looming threat of inflation. As a result, conforming mortgage rates rose through 7 of the next 10 days, driving pricing to its worst levels of the year.

This may happen again beginning today.

At 2:15 PM ET, the FOMC will adjourn and make a press release to the markets. The Fed is expected to keep the Fed Funds Rate near its target range of 0.000 percent, and to keep its $600 billion bond buy program in place. That doesn't mean mortgage rates will idle, however.

Depending on the verbiage of the Fed's statement, Wall Street will make its new bets. A tough approach on inflation should push mortgage rates down; a soft approach should pressure rates up. Either way, you may want to lock your mortgage rate prior to 2:15 PM ET -- just to be safe.

Once the Fed adjourns, you're at the market's mercy.

Fed Minutes Show Lower Unemployment And Higher Growth For 2011 and 2012

The Federal Reserve released its January 25-26, 2011 meeting minutes Wednesday afternoon. California mortgage rates have been in flux since.

Fed Minutes are comprehensive recaps of Federal Open Market Committee meetings; a detailed look at the debates and discussions that shape our nation's monetary policy. As such, they're released 8 times annually; 3 weeks after the most recent FOMC meeting.

Fed Minutes can be viewed as the unabridged version of the succinct, more well-known "Fed Statement" that's released to markets immediately post-adjournment.

Just how much more lengthy are Fed Minutes?

• The January 25-26, 2011 statement contains 395 words
• The January 25-26, 2011 meeting minutes contains 6,916 words

If the Fed Statement is an executive summary, the Fed Minutes is a novel. And, the extra words matter.

When the Federal Reserve publishes its minutes, it's offering clues about the group's next policy-making steps.  As an example, in the January minutes, the Fed improved its outlook for economic growth; lowered its projections for the Unemployment Rate; and removed its concern for deflation.

In addition, the Fed discussed the potential for food-and-energy-cost-induced inflation, but labeled it as a minor economic risk at this point in time.

Bond markets are mixed on the text of the Fed Minutes.

Although the Fed indicates a willingness to allow inflation to occur, it appears ready to act in case inflation goes too high. One way that the Fed responds to rising inflation is to raise the Fed Funds Rate and many economists believe this will start happening by late-2011 or early-2012.

What's Ahead For Mortgage Rates This Week : February 7, 2011

Mortgage markets worsened last week as Wall Street came to terms with the expanding economy; and realized the Federal Reserve may be trying to induce inflation.

Better-than-expected retail sales and positive job growth buoyed stock markets and sank bonds.

Mortgage rates in California rose for the 4th time in 5 weeks last week, extending a losing streak which dates back 4 months.

Today, fixed, conforming rates are three-quarters of a percent higher as compared to the market's low point, November 3, 2010. For a $200,000 home loan, that size rate hike equates to an increase in a monthly mortgage payment of $89 per month.

Mortgage rates are at their highest levels of the year and, this week, they may continue ticking higher.

There isn't much data set for release this week so markets will take their cues from two major events -- one economic and one political.

The major economic event is Fed Chairman Ben Bernanke's testimony to the House Budget Committee late-Wednesday. Chairman Bernanke is expected to speak about employment, but will likely touch on other topics of import including economic growth, the U.S. dollar, and the nation's debt ceiling.

The Fed Chairman's comments will move mortgage rates in one direction or the other, so locking in advance of his testimony may be prudent. Mortgage rates have more room to rise than to fall, after all.

The second major event is Egypt's ongoing political strife. By Thursday of last week, Wall Street had shrugged off the region's crisis and unwound the safe-haven trades that had helped mortgage rates during the week prior.

If instability returns, mortgage rates, once again, will be pressured lower.

Regardless of your rate-locking plan for this week, it's important to recognize that, although rates have risen, they're still well below historical average. Therefore, rates may have a lot of room to move higher, still.

If you're shopping for a mortgage, or are now under contract, consider locking your rate as soon as possible.

What's Ahead For Mortgage Rates This Week : January 3, 2011

Mortgage markets improved last week during a snow- and holiday-thinned series of sessions on Wall Street. Mortgage bonds improved on year-end profit-taking, mostly, leading conforming mortgage rates in California lower.

Last week marked the first calendar week in which mortgage rates dropped since early-November, a pleasing development for rate shoppers and home buyers. Falling rates means lower monthly mortgage payments.

But don't expect for rates to improve again this week, however. Last week's gains were the result of extremely low trading volume and a close-out of 2010 mortgage bond positions. With markets re-opened for 2011, and Wall Street back at full volume, mortgage rates may resume rising.

There will be a lot of data and information on which for mortgage bonds to trade, too.

The week starts with a growth report from the U.S. manufacturing sector. The Institute for Supply Management's monthly report has shown improvement over 16 straight months, and Monday's report is expected to show the same. Because manufacturing is key in U.S. economy, a stronger-than-expected value could send stock markets higher, and mortgage rates, too.

Then, Tuesday, the Federal Reserve releases the minutes from its December meeting. There won't be policy changes transcribed in the minutes, but Wall Street will scrutinize its pages for clues on the economy. A bullish bias from the Fed will push rates higher. A bearish bias will drag rates lower.

And lastly, Friday, the government will release its Non-Farm Payrolls report for December. This is a major market-mover because of how closely jobs are tied to the economy overall. Plus, Fed Chairman Ben Bernanke speaks Friday -- another risk to mortgage rates.

The gravity of this week's economic releases and speeches should make shopping for a mortgage difficult. Stay in close touch with your loan officer about mortgage rates and how they're moving. And if you see a rate you like, lock it.

There's no promise rates will ever go lower.

What's Ahead For Mortgage Rates This Week : December 6, 2010

Mortgage markets lost ground last week on growing optimism for the economy, a poor run for the dollar versus the euro, plus the lingering concerns that inflation will grip the U.S. long-term.

Conforming mortgage rates in California rose for the fourth week in a row, stymying rate shoppers and raising the effective cost of homeownership for new buyers in need of a mortgage.

After a spectacular run that drew 30-year fixed rates to near 4.00, mortgage rates have returned to their highest levels since late-June.

Last week was heavy on news. Bond traders were hit with the Beige Book; with the ADP Challenger Report; with the ISM Manufacturing Report; and, with Pending Home Sales data for October. Each release moved markets.

Only Friday's Non-Farm Payrolls report kept mortgage rates from really soaring.

According to the government, 39,000 net new jobs were created in November, and September's and October's data was revised higher by a combined 38,000.  The sum of these figures fell well short of Wall Street expectations -- investors has expected 146,000 net new jobs in November.

As a result, mortgage rates made their largest, intra-day improvement of the year Friday morning, although they slid higher through the afternoon. Rates fell 1/8 percent Friday as compared to Thursday and rate shoppers may see that momentum carry forward into this week.

Fed Chairman Ben Bernanke gave a televised interview Sunday evening in which he said, among other things:

1. "The fear of inflation is way overstated."
2. Additional bond market support is "certainly possible".

Both comments should help to allay inflation concerns, and may lead mortgage rates lower this week. If you're floating a mortgage rate, keep a watchful eye on markets and be especially wary if mortgage rates start to rise again. November was rough on mortgage bonds.

If December follows suit, expect mortgage rates to approach 6 percent.

Meltdown Post Mortem Ad Nauseum

The Fed continues to be grilled over whether it caused the mortgage meltdown via low interest rates, or allowed it via lax bank supervision.  Here's the latest:  Fed Transcripts Stoke Debate on Rates - NYTimes.com. 

So what's the answer?  They allowed it via lax bank supervision.  Those insisting the Fed caused the mortgage meltdown via encouraging low short-term interest rates don't understand (or don't want the public to understand) basic macroeconomics, and like to imply that the Fed has more influence on mortgage rates than it does.

FT.com - Kohn makes case for low interest rates

Outgoing Federal Reserve VC Don Kohn makes case for continued low interest rates, in support of Fed Chair Bernanke's position on the matter.  He's got it right. 

The recovery is real but fragile.  The few calls for increasing rates that are beginning to trickle out of other camps within and beyond the Fed are based upon a dangerous, destabilizing paranoia: that central banks must raise rates whenever they are low, simply because they might later be blamed (e.g., for the inflation that might happen or the low-rate mortgages that might be granted or the comparisons with Alan Greenspan that might be made) if they don't. - David

Bernanke: Low Rates Still Needed - WSJ.com

Ben's got this one right: Low rates are still very important to our recovering economy. 

Bernanke: Low Rates Still Needed - WSJ.com

Still, it puzzles me why he would be even hinting at raising rates in the future.  We are so far from an inflationary scenario that it's precisely what he should NOT be signalling at this time. Yet the inherent nature of a central bank is to have its finger poised closed to the short term interest rate trigger, perhaps because that's the most powerful direct economic weapon it has. 

Right now, it would make a lot more sense to holster that weapon entirely. - David

Fed seeks to clarify discount rate move - FT

Amidst the market's nervousness and confusion over yesterday's Discount Rate adjustment, here's the Financial Times' take on what Ben Bernanke is thinking! - David

It's Not About Ben! - The Housing Meltdown Explained (by David White)

Fed Chariman Ben Bernanke recently inferred that the Fed's policy of low interest rates was not a major factor in the mortgage meltdown. That's right and wrong, and he's taking some heat for it. Let's sort it out:

He's RIGHT because low rates targeted by the Fed and endorsed by the originators (lenders) and backers (Freddy, Fannie, AIG, etc.) of those mortgages certainly improved the affordability of housing and homebuilding, a strong positive, contributing to the housing boom and a great deal of desirable new construction. Prudent capital investment by the private sector is a good thing, and it is encouraged by low costs of borrowing.