Upon further review: Fed's words drop mortgage rates

Three weeks after the Federal Reserve's rate-setting committee met, the panel sent mortgage rates downward.

The Fed's open market committee performed the gravity-complying feat merely by releasing the minutes of the March 22 meeting. The market's reaction was swift when the document was released April 12: Long-term interest rates and bond yields dropped about one-tenth of a percentage point, then recovered a bit at day's end.

The benchmark 30-year fixed-rate mortgage fell 7 basis points to 5.95 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.31 discount and origination points. One year ago, the mortgage index was 5.97 percent -- just 2 basis points higher than this week. Since then it has gone as high as 6.37 percent and as low as 5.59 percent.

The 15-year fixed-rate mortgage fell 4 basis points to 5.55 percent. The 5/1 adjustable-rate mortgage fell 3 basis points to 5.41 percent.

Until the release of the open market committee's minutes, rates and yields had been flat for a week and a half, with the 10-year Treasury yield ranging from 4.44 percent to 4.50 percent. But when the minutes came out, the 10-year yield fell. Mortgage rates tend to move in the same direction as Treasury yields.

Bond traders inferred that the rate-setting committee believes long-term inflation is under control. That's an understandable interpretation if you don't read the minutes all the way to the end.

Early on, the committee's minutes say that, in the 12-month period ended in January, overall consumer prices were "boosted significantly," but were "fairly subdued" after stripping out the volatile energy and food components. "A survey measure of near-term inflation expectations moved up in early March, but long-term expectations had changed little since the end of last year."

The minutes repeat that point at least four times after that, stated in various ways: inflation might pop in the short term, but doesn't look like a threat in the long term.

Then the about-face, sort of: "Still, many participants indicated that their uncertainty about the intensity of inflation pressures had risen in response to recent developments and that, in particular, the distribution of possible inflation outcomes was now tilted a little to the upside."

And later: "Several participants indicated that, in current circumstances, they viewed an upside surprise to inflation as potentially more harmful than an equivalent downside surprise, partly because such an outcome could well impart additional upward momentum to inflation expectations."

Finally, the minutes say that some of the committee's members argued that it soon will be time to retire the phrase that says interest rates can be raised "at a pace that is likely to be measured." Bond traders interpret the phrase to mean that the Fed plans to keep raising short-term rates a quarter-point at a time.

"Some expressed the view that such language could constrain future policy inappropriately," the minutes said, adding later that "the odds that the committee might need to step up the pace of policy firming were thought to have increased."

That's a warning that the Fed will raise short-term rates a half-point at a time if the committee deems it necessary. And it's the opposite of a reassurance that long-term inflation is under control.