Wednesday, June 24
Posted 4 p.m. Eastern

Fed: Inflation to be 'subdued for some time'

The Federal Open Market Committee concluded this afternoon. Let's get the obligatory stuff out of the way first: No, they didn't increase interest rates (we're light-years away from that happening) and they didn't make any changes to their buyback programs (the "let the chips fall where they may" scenario outlined in my previous post).

I see three things that stand out from this FOMC statement. First, the Fed validated the "less bad" economic scenario, saying "the pace of economic contraction is slowing." In the world of Fed Word Parsing, that is a change from "appears to be somewhat slower" following the April meeting. This is encouraging in a sense, as the free-fall economic scenario so feared just a few short months ago is now apparently behind us.

Secondly, the Fed deleted a reference to concerns about deflation and devoted an entire two sentences to inflation. Woo-hoo! That is enough to assuage bond investors, for now, but as the year progresses methinks the Fed will have to sharpen the tone even further or longer-term interest rates will resume the climb. For now, the Fed points to a lack of pricing power by businesses because of the "substantial resource slack."

And third, the Fed isn't in a position to lay out an exit strategy from the liquidity programs, but they did give a nod to the eventuality of doing so by saying they "will make adjustments to its credit and liquidity programs as warranted."

The second and third items together are aimed at bond investors, who had pushed up rates on longer-term debt -- maturities of two years and longer -- on concerns about eventual inflation resulting in part from all of the liquidity programs. Just to repeat, I believe the Fed will need to sharpen this language even further as the year progresses or rates on those same longer-term debt instruments could resume the upward climb. The Fed expects inflation to remain low for some time, but so do investors. It's two, three, four years down the road that has investors concerned and the Fed will ultimately need to speak to that.

Posted 8 a.m. Eastern

What can the Fed do about mortgage rates?

The Federal Open Market Committee meets today, and while any changes to short-term interest rates are light-years away, many are wondering if the Fed will further target long-term interest rates.

An early June spike in Treasury yields had the 10-year note kissing 4 percent and conforming 30-year, zero-point fixed rates flirting with 6 percent. With approximately $1 trillion left in Treasury, mortgage-backed and GSE debt buybacks over the balance of 2009, this will keep a lid on mortgage rates. But a 58 percent plunge in the Mortgage Bankers Association Applications Survey Refinance Index from May 20 through June 17 of this year shows there is a big difference between keeping a lid on mortgage rates and pushing rates down to levels that generate a frenzy of refinancing and home buying activity.

So the question begs: What can the Fed do, and what, if anything, will they do? The options at their disposal include accelerating the pace of purchases, increasing the amount of purchases, extending the time period over which the purchases take place or do nothing further than already announced.

Accelerating the pace of debt purchases pumps more of that remaining money into bond markets sooner rather than later and could help bring rates down from current levels.

Increasing the amount of the purchases seems like an obvious answer, after all, it worked well in November when the initial mortgage debt buyback was announced and again in March when the program was increased and extended to include Treasury debt.

But further increases to the amount in play could do more harm than good. For starters, it was a concern about the eventual inflationary consequences from pumping so much stimulus into the economy that sparked the late May/early June rise in rates. Increasing the buyback program only exacerbates those concerns. And even if the Fed did bring mortgage rates lower, it doesn't change the dynamics of the real estate market. Sure, refinancing applications would surge again, but those are applications, not loan closings. There are plenty of other obstacles between loan application and closing day, including the issue of sufficient equity or being too far upside-down to qualify; tighter underwriting guidelines for debt ratios, credit scores and proof of income; and whether or not an appraisal ordered under the new Home Valuation Code of Conduct will support or torpedo the deal. For homebuyers, mortgage rates are still low enough that they're not an impediment to a well-qualified buyer and even lower mortgage rates don't solve the buyer's down-payment dilemma.

The Fed could extend the time period of the purchases beyond 2009, but that does nothing to bring the current level of bond yields and mortgage rates lower while potentially diluting what effect upcoming buybacks would have.

Finally, the Fed could administer the silent treatment and make no announcements about further changes. This "let the chips fall where they may" policy only impacts long-term rates if it deviates from expectations.

And just what should our expectations be? The post-meeting FOMC statement will contain an economic assessment largely the same as following the April meeting. Given the recent rise in energy prices, we can expect a nod to the inflation concerns through the Fed reiterating an intent to maintain price stability. And an acknowledgement of improvement in financial markets as the TED spread -- the difference between 3-month LIBOR and 3-month Treasury yields that reflects tensions in interbank lending -- has fallen to pre-credit crunch levels of 43 basis points.

But as far as quantitative programs designed to reduce long-term bond yields and fixed mortgage rates, accelerating the pace of purchases rather than the amount is more likely. If any new initiatives are announced, one area that has been ignored up to this point is the jumbo mortgage market, where rates remain stubbornly near the 7 percent mark with no viable secondary market.

Check back after 2:15 this afternoon for Bankrate's full coverage of the Federal Open Market Committee's meeting.

Wednesday, April 29
Posted 4 p.m. Eastern

Fed: Economy contracting "somewhat slower"

The Federal Open Market Committee concluded its meeting this afternoon, and the accompanying statement was a bit rosier, though still very cautious and guarded, compared with those seen in recent months.

In particular, the Fed noted that while the economy continues to contract, the pace "appears to be somewhat slower." There were other notable changes since the March meeting statement, with the Fed noting that "household spending has shown signs of stabilizing but remains constrained" and "the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions."

But the Fed reiterated that the economy "is likely to remain weak for a time." When economic growth does resume, it will happen "in a context of price stability," a clear nod that the Fed is aware of the inflation consternation so many of us (including yours truly) have.

The Fed issued no new programs and deleted a reference by name to the TALF, which was slow to get off the ground and has been equally slow in getting credit to flow again in the beleaguered student loan, credit card and small-business markets. The fact that the Fed didn't make any headlines is good news and is reason for some optimism on the economic front.

Fed Outlook archive