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The Fed Minutes and Mortgage Rates


Just a few short hours ago, the Federal Reserve released the hotly anticipated FOMC “minutes” from its two-day meeting that took place back on April 30th and May 1st, 2013.

The contents weren’t all that exciting, though they seemed to be enough to result in a 200+ point stock market swing.

The markets opened considerably higher this morning, only to take a beating after the minutes were released, with the Dow falling roughly 80 points.

What Was Said at the Meeting?

  • The Fed basically said inflation was stable
  • Which meant they didn’t need to raise key interest rates
  • Because the economy is still questionable
  • But if and when the economy heats up they’ll change their tune

In a nutshell, the Fed said economic growth expanded moderately in the first quarter, unemployment edged lower (but employment growth slowed), and consumer price inflation remained low, with expectations for future inflation stable.

Put simply, there wasn’t all that much drama in the economy during the first quarter, and things appear to be on track, albeit not a fast track to anywhere good or bad.

The Fed didn’t even seem to express any excitement about recent developments in the housing market, highlighting the decline in existing home sales in March alongside rising prices.

For the record, those sales were revised upward today by the National Association of Realtors, and April existing home sales were the highest since November 2009, when the homebuyer tax credit gave the market a temporary boost.

Anyway, the takeaway is that the Fed isn’t yet convinced that the economy is good to go. It will take months of solid and convincing improvement for the Fed to taper its accommodative monetary policy.

That said, the Fed voted to continue its purchases of mortgage-backed securities (MBS) at a pace of $40 billion per month, and longer-term Treasury securities at a pace of $45 billion per month.

[What QE3 means for mortgage rates.]

Isn’t This Good News?

  • Mortgage rates are lower than usual
  • Thanks to the Fed’s MBS buying program, but it’s not going to be around forever
  • And once they stop buying mortgages we could see mortgage rates jump
  • Thanks to increased supply and an overall indication that the economy is strong enough to end the program

If the Fed continues to buy Treasuries and MBS, mortgage rates should stay low, right? After all, if demand for mortgages is strong, prices will rise, and yields (and rates) will fall.

Well sure, that logic is sound, but the Fed’s MBS purchase program is nothing new, and the fear of losing it after everyone got so accustomed to it is unnerving to say the least.

And guess what – the minutes revealed that some of the participants (unclear how many) “expressed willingness” to lower the rate of purchases as early as the Fed’s June meeting.

Meanwhile, one participant recommended deceasing the rate of purchases immediately, while another suggested shifting purchases away from MBS and over to Treasuries in light of the recent housing recovery.

In other words, there is increasing pressure on the Fed to slow (or end) its purchases of MBS, which will inevitably lead to higher mortgage rates.

And that day seems to be getting closer and closer as more and more positive economic reports are released.

Sadly, mortgage rates are already at or near 2013 highs, so if the Fed really decides to pump the brakes and slow their MBS purchases, 30-year fixed mortgage rates could say goodbye to the 3% range and settle in above 4%.

Of course, we might be fearing the worst for no apparent reason other than fear itself.

In prepared remarks before Congress this morning, Fed chairman Ben Bernanke didn’t seem to indicate any decisive action on the Fed’s behalf.

Rather, he noted that prematurely withdrawing policy accommodation before there is a clear sign of a recovery could do a lot more harm than good.

And let’s face it; there will be plenty of bumps in the road to recovery. Just look at the latest weekly numbers from the Mortgage Bankers Association, which revealed that mortgage applications declined 10% week-over-week.

Additionally, the refinance index has declined nearly 20% over the past two weeks to its lowest level since March.

Clearly the Fed won’t want to do anything drastic enough to derail the housing market, which after more than five terrible years has finally displayed a few months of solid gains.

Still, the Fed can only do so much to control mortgage rates, and as the economy continues to improve, rates will have nowhere to go but up.

Read more: Mortgages vs. inflation

(photo: Lyra Jaye)

Colin Robertson

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