Sun State Savings

Min­utes of the April/May Fed­eral Open Mar­ket Com­mit­tee (FOMC) recently released may have a sig­nif­i­cant impact on mort­gage rates going for­ward.  One sig­nif­i­cant devel­op­ment from the meet­ing sug­gests that the present quan­ti­ta­tive eas­ing (QE)  pro­gram may be mod­i­fied in the near future. 

The cur­rent QE pro­gram involves the Fed pur­chas­ing $85 bil­lion per month in mort­gage backed secu­ri­ties (MBS) and Trea­sury bonds. The Fed’s goal with QE is keep­ing long-term inter­est rates, includ­ing mort­gage rates, low.

Con­sid­er­a­tions men­tioned in favor of slow­ing the cur­rent QE pro­gram include con­cerns over “buoy­ant” finan­cial mar­kets as evi­dence of a devel­op­ing eco­nomic “bub­ble”. FOMC mem­bers in favor of con­tin­u­ing the cur­rent eas­ing pro­gram cited fears of eco­nomic defla­tion result­ing from cut­backs in QE.

Fed Chief Calls Cur­rent Bond Buy­ing Pro­gram “Overheated”

In related news, Fed chair­man Ben Bernanke, in tes­ti­mony before Con­gress, char­ac­ter­ized the cur­rent QE pro­gram as “over­heat­ing the econ­omy,” but he also stated that slow­ing eco­nomic growth is a worse alter­na­tive than con­tin­u­ing the cur­rent QE pro­gram. Chair­man Bernanke noted that QE is sup­port­ing finan­cial mar­kets and the econ­omy and indi­cated that it is not time to reduce the Fed’s support.

Diverse opin­ions within the FOMC added to the impasse over QE, as one mem­ber advo­cated for imme­di­ate taper­ing of the QE pro­gram, while another pro­posed expand­ing QE purchases.

The FOMC noted a num­ber of chal­lenges includ­ing the national unem­ploy­ment rate of 7.60 per­cent at the end of March, that pri­vate sec­tor hir­ing plans were “sub­dued,” and that job­less claims had trended up dur­ing the inter-meeting period.  Among numer­ous eco­nomic pos­i­tive sta­tis­tics cited, the Fed noted that con­sumer spend­ing improved and was dri­ven by higher auto­mo­tive sales and a drop in fuel prices.

The FOMC min­utes reflect that some mem­bers had con­cerns about the abil­ity of con­sumer spend­ing to hold with­out notable improve­ment in hir­ing and busi­ness invest­ment. Busi­nesses con­tacts of FOMC mem­bers were reluc­tant to plan addi­tional hir­ing and invest­ing in their busi­nesses based on reports of decreased man­u­fac­tur­ing and lower inter­na­tional demand for products.

Good News Revealed About Low Future Infla­tion Expectations

The Fed pre­dicted mod­est infla­tion over the medium term, and expected infla­tion to remain sub­dued until 2015. The Fed will main­tain its bench­marks for adjust­ing the Fed­eral Funds Rate and QE based on the national unem­ploy­ment rate reach­ing 6.50 per­cent and the infla­tion rate reach­ing 2.00 percent.

The FOMC char­ac­ter­ized the improv­ing hous­ing mar­ket as respon­si­ble for eco­nomic improve­ments for related busi­nesses, but also acknowl­edged that increas­ing demand for hous­ing was being caused by low inven­to­ries of avail­able homes rather than buyer enthu­si­asm alone.

Improv­ing home prices and eas­ier con­sumer credit terms were viewed as con­tribut­ing to improve­ment in over­all eco­nomic con­di­tions. These fac­tors increase house­hold cash flow and pro­vide con­sumers with more dis­cre­tionary income for spending.

While the FOMC mem­bers did not agree on how or if to revise their cur­rent QE pol­icy, it seems likely that the next meet­ing will bring increased scrutiny of QE and its impact on cur­rent eco­nomic conditions.