Why is the Fed FOMC Meeting this week such a big deal?
Why is the Fed FOMC Meeting this week such a big deal?
This week all eyes are on the Federal Open Market Committee meeting, as the market waits for the Federal Reserve’s tapering decision. Both the FOMC policy statement and its up-to-date economic and market projections will be released on Wednesday at 2 p.m. EST, followed by Fed Chairman Ben S. Bernanke’s press conference at 2:30 p.m. EST.
Why is this all such a big deal?
In the real estate world, we are watching to see if the Fed begins tapering – the term used for cutting back on the purchases of Treasuries and MBS (Mortgage Backed Securities) that constitute the current round of quantitative easing, known as QE3. To oversimplify it, if the Fed begins tapering, it will likely drive mortgage rates up further.
So why is the Fed looking to taper these purchases now, and how likely is it that they will do so on Wednesday?
It all has to do with the health of the economy – the Fed needs to stop QE3 sometime, and it appears that the economy is showing enough signs of strength that now would be the time to begin. Specifically, how swiftly the Fed cuts its QE purchases will depend a lot on the evolution of the labor market. The Fed announced its most recent round of QE in September of last year, and it has been buying $85 billion a month since January ($45 billion in Treasuries, $40 billion in MBS). Recent economic data has shown signs that the economy is improving, and that jobs are stabilizing. Economic stability and improvment is exactly what the Fed has been waiting for to pull the trigger on tapering (which they did NOT do in September’s meeting).
So what to do now?
Be prepared for lots of interest rate volatility this week as the markets work to stay ahead of the Fed moves and speculation abounds. Keep in close communication with your favorite Mortgage Loan Professional and have them keep you abreast of what happens throughout the week.
Last Week’s Mortgage Rate Recap
Mortgage Rates Currently Trending: NEUTRAL
Last week saw rates remain mostly flat, with most lenders worsening rebate pricing (the cost to obtain a rate or the credit the lender gives you towards your closing costs when selecting a rate) as MBS (Mortgage Backed Securities) sold off a net loss of -35 basis points. Most consumers would have seen their offered mortgage rate remain the same, but would have gotten a lower amount as a credit towards closing costs or would have paid a little bit more to obtain the same rate. The week started with a nice bounce back from the lows we experienced the week before. Wednesday was a bad day for rates as the MBS market sold off, giving back the gains from Monday and Tuesday. Thursday continued the sell off slightly, until we saw a reversal and a positive day for pricing on Friday. It’s important to note that since November 18th, we’ve lost about 230 basis points in the MBS market, meaning that traders have priced themselves towards a Fed tapering.
This Week’s Mortgage Rate Forecast
Mortgage Rates Forecast: VOLATILE, and heavily dependent on Wednesday’s FOMC announcement
This week is going to prove to be volatile and hard to predict, both before the Fed’s FOMC announcement on Wednesday, as well as after depending on what the Fed announces. There is a large consensus that the Fed will announce their intent to begin tapering. If that does occur, we may very well see more selling off in MBS, even though the market has already been pricing that in. If the Fed announces that they are not yet ready to taper, as happened in September, the market should react very positively and MBS pricing will improve along with mortgage rates.
BOTTOM LINE: It is very important this week to stay in contact with your Mortgage Loan Professional, especially on Wednesday when the Fed makes their announcement. If they announce tapering, be prepared for rates to go up slightly. If they announce they will not yet taper, it is likely that rates improve anywhere from .125% to .250%. The only way to stay ahead of lenders who will raise interest rates when that happens is to stay in close contact with your LO who is monitoring the market in real time with an institutional grade Wall St. data feed. Be prepared for volatility later this week.
