FOMC Minutes Suggest QE Tapering by Year-End
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 concerning the committee’s intention to monitor inflation and ongoing economic and financial developments before taking action to reduce the current rate of QE.
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, 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.
Last week was jam-packed with economic news; here are some highlights with emphasis on housing and mortgage related news:
Monday: Retail sales for April increased to -0.1 percent from the March reading of -0.5 percent and also surpassed Wall Street’s downward forecast of -0.6 percent. Retail sales are important to economic recovery as sales of goods and services represent approximately 70 percent of the U.S. economy.
Tuesday: The National Federation of Independent Business (NFIB) released its Small Business Optimism Index for April with encouraging results. April’s index rose by 2.6 points to 92.1. A reading of 90.7 indicates economic recovery. This index is based on a survey of 1873 NFIB member businesses.
Wednesday: The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for May matched investor expectations with a reading of 44. At three points above the March reading of 41, this report suggests that builders are slowly gaining confidence in national housing markets.
Thursday: The U.S. Commerce Department reported that Housing Starts fell by 16.5 percent in April to a seasonally-adjusted annual level of 853,000 from 1.02 million housing starts in March. This reading fell short of investors’ consensus of 965,000 housing starts, however, this decrease was caused by the volatile apartment construction sector.
Friday: Consumer sentiment for May surpassed investor expectations of +0.3 percent and came in at +0.6 percent. As consumer sentiment improves, it’s likely that more consumers will buy homes.
Rising Interest Rates Show Strengthening Economy
Mortgage rates rose last week according to Freddie Mac. The average rate for a 30-year fixed rate mortgage rose from 3.42 percent to 3.51 percent with borrowers paying 0.70 in discount points and all of their closing costs.
15-year fixed rate mortgages rose from 2.61 percent last week to 2.69 percent this week with borrowers paying 0.70 in discount points and all of their closing costs.
This news is consistent with a strengthening economy, but is narrowing opportunities for home buyers seeking both affordable home prices and low mortgage rates.
Federal Open Market Committee Minutes To Be Released This Week
Looking ahead, economic news for this week includes the Existing Home Sales report for April with an expectation of 5.00 million homes sold on a seasonally-adjusted annual basis against the March tally of 4.93 million homes sold.
Also set for release on Wednesday are the Federal Open Market Committee (FOMC) Minutes for the meeting held April 30 and May 1. The FOMC meetings typically include discussions of the Federal Reserve’s current policy on quantitative easing (QE) which consists of the Fed buying $85 billion per month in MBS and treasury bonds.
When the QE program ends, mortgage rates will likely increase as bond prices decline due to lesser demand.
Thursday brings the weekly Jobless Claims Report along with New Home Sales for April. The consensus for new homes sold is 430,000 as compared to the March reading of 417,000 new homes sold.
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, will release its Home Price Index for March on Thursday.
Mortgage bond prices remain positive this morning despite the data, helping rates extend the improvements from yesterday.
Today we have ADP employment, factory orders, and the results from the Fed meeting.
Factory orders up 2.1%, expected up 1.6%.
ADP employement showed a job increase of 43k. Analysts were expecting an increase of 23k. So far the reaction has been muted by hopes of continued Fed quantitative easing. Quantitative easing is tool used by the Fed to increase the supply of money by increasing the excess reserves of the banking system. The Fed basically creates money out of nothing, crediting it’s own accounts, then uses those funds to purchase financial assets usually including government bonds and mortgage backeds securities from financial institutions.
The rest of the week looks to be interesting. We still have productivity data and the employment report. There is more potential for wild market swings so be cautious.
Mortgage bond prices are positive this morning helping to bounce back a bit from the steep selloff yesterday.
Traders will position themselves ahead of the Fed results tomorrow afternoon. Many believe the Fed will announce continued quantitative easing. Quantitative easing is tool used by the Fed to increase the supply of money by increasing the excess reserves of the banking system. The Fed basically creates money out of nothing, crediting it’s own accounts, then uses those funds to purchase financial assets usually including government bonds and mortgage backeds securities from financial institutions.
The rest of the week looks to be interesting. We have a Fed meeting, productivity data, and the employment report all in a single week. This is not your typical week with the significant data and elections all hitting us at once. There is more potential for wild market swings, as was evident this afternoon with the terrible slide in prices pushing rates higher.
For U.S. Treasury Secretary Timothy F. Geithner, a weaker dollar may now be in the national interest. The dollar has dropped more than 7 percent since Aug. 27, when Chairman Ben S. Bernanke signaled the Federal Reserve is prepared to ease monetary policy. Where once such a decline may have been met with resistance from the U.S., Geithner may now be tolerating it as a way of bolstering the recovery.
Higher stock prices in turn are bolstering consumer and business confidence. The danger is that the decline gets out of hand, fueling increases in the cost of living over the long term and prompting investors to avoid U.S debt. As the dollar falls relative to foreign currencies, everything we export becomes less expensive to foreign consumers. So they buy more of our stuff, creating more jobs in the U.S. At the same time, everything they make costs us more. So we buy less from them and more from each other. Again, more jobs here at home.
Washington is actively pursuing a weak dollar as a jobs policy. (The dollar just plunged to a six-month low against the euro.) How? The Fed is keeping long-term interest rates so low global investors are heading elsewhere for high returns, which bids the dollar down. Every time another Fed official hints the Fed will start printing even more money (“quantitative easing” in Fed speak) the dollar takes another dive.
Meanwhile, Congress is ginning up legislation to allow the President to slap tariffs on Chinese imports because China is “artificially” keeping its currency low relative to the dollar. But using a weak dollar to create American jobs is foolish, for two reasons. First, no other country wants to lose jobs because its currency becomes too high relative to the dollar. So a weak dollar policy invites currency wars. Everyone loses.
At least a half dozen other countries are now actively pushing down the value of their currencies. Japan recently sold some $20 billion of yen in order to keep the yen down, the biggest ever sell-off in single day. Brazil’s high interest rates are attracting global investors and pushing up the value of Brazil’s currency. This is crippling Brazil’s exports and fueling unemployment. Here’s the other problem. Even if we succeed, a weak dollar makes us poorer. Imports are around 18 percent of the US economy, so a dropping dollar is exactly like an extra tax on 18 percent of what we buy.
It’s no big accomplishment to create jobs by getting poorer.