Explaining Last Weeks Fed Meeting

The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged last week. It remains within a target range of 0.000-0.250 percent.

In its press release, the FOMC reiterated most of the key points from its December 2008 statement, including:

• The U.S. employment outlook continues to deteriorate
• Consumers and businesses continue to cut spending
• The housing sector is still showing weakness

In addition, the FOMC addressed the "extremely tight" credit conditions for U.S. households and business, even as it said some financial markets are showing signs of improvement.

To the Fed, the latter is a precursor for the former. For Americans needing new mortgages or other forms of credit, it may mean that getting approved gets easier sometime late this year.

Most importantly, the Fed's press release again mentioned the policy-setting group's intention to "employ all available tools" to promote economic growth. This includes the open-market purchasing of mortgage-backed debt that has helped fuel the current Refi Boom. The Fed indicated a willingness to extend the program beyond the initial $500 billion, if necessary.

For each of the Fed's interventions, though, there is a trade-off.

Buying securities costs money and the Fed -- literally -- comes up with the cash by printing it. The extra supplies devalue the U.S. dollar which, if left unchecked, can cause the Fed's plan to backfire in the form of runaway money supply-led inflation. The Fed is aware of this risk and is pledged to monitoring it closely.

Overall, mortgage rates worsened today after the Fed's statement.

Source
Parsing the Fed Statement
The Wall Street Journal Online
January 28, 2009
https://online.wsj.com/internal/mdc/info-fedparse0928.html

How Unemployment May Make your House More Affordable

On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly, it's called the "jobs report" and the October's data is trending with the rest of 2008.

After shedding another 240,000 jobs last month, the economy has now put 1.2 million Americans out of work this year and unemployment rates have climbed to 14-year highs.

As a strange twist, though, today's weak jobs data may lead to a positive turn for the economy and for housing in 2009.

In the wake of the jobs report, members of Congress are already calling for both tax cuts and direct stimulus to reverse the course of the economy. Both of these actions would put money back into U.S. citizens' household budgets, spurring consumer spending nationwide.

Because consumer spending accounts for 70 percent of the economy, this would be expected to push the economy forward at a time when it natural forces are slowing it down.

In addition, markets are betting that the Federal Reserve will cut the Fed Funds Rate below its current 1.000 percent level. This, too, would spur spending because the Fed Funds Rate is directly tied to consumer credit card rates and business credit lines.

Expectations for stimulus are one reason why mortgage rates have not risen today as high as they otherwise would have if this were a "normal" market.

Mortgage rates are slightly elevated as we head into the weekend, but don't be surprised if there's a late-afternoon push that brings them lower. For active home buyers, this could help home affordability as we cruise towards the holiday season.

(Image courtesy: USA Today)