The big event for those following mortgage interest rates and the factors which make them move, was the release of the Federal Open market Committee’s statement following the end of their two day meeting today. Any Fed meeting is always a big event, but this one loomed larger than most. Over the last month mortgage interest rates have jumped nearly a full point (before settling down some over the last week) and putting an end to the refinance boom that had been chugging along since last December. The higher mortgage rates haven’t been enough to derail the purchase market, which has been driven by first time home buyers and helped along with an $8,000 government rebate. But the fear has been that if rates get much higher the purchase market will crash and the housing market will take another direct hit. All the experts agree that in order for the economy to improve, the housing market has to get better. Over the last few months there have been signs that housing is stabilizing, but with unemployment increasing this recovery is fragile. The Fed strategy has been to pump money into mortgage backed securities in order to keep rates low, but that was before inflation fears caused the bond market to melt down. So, all eyes were on the Fed to see what they were going to say, and what side they would come down on as to what our biggest problem was, inflation or the economic slowdown.

The Fed is famous for not giving much away. They don’t make their statements in normal English but a convoluted form that might be called Fedese (Fedlish?). All the phrases are spun in a way to make interpreting their absolute meaning difficult. This means that you can interpret the statement differently depending on what your initial preconceptions are, and what you think is going to happen in the near future. This time was no different and the Fed gave a little something for everyone. This was shown convincingly after the statement was released when the mortgage bond mark improved quickly, then sold off just as quickly before finally ending the day exactly where it started.

The way I read the tea leaves, the Fed has made a decision to keep rates low, and though the worst of the down turn appears to be over, they still have work to do. Here are some items taken from their statement which suggest that they are trying to bring rates down and that mortgage rates should remain low:

• The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. – They aren’t raising rates now, and they don’t intend to at any time in the near future.
• To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. - They will continue to buy both mortgage backed securities and treasuries in an effort to keep rates low.
• Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. - The economy is better, but we aren’t out of the woods yet.
• The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time. – Inflation may be a problem down the road, but they have bigger problems now.

But this is just my reading of the statement. What matters is how the markets will read the tea leaves and if they collectively think the Fed is misplacing their responsibilities and inflation is still the bigger problem, rates could rise again no matter what the Fed tries to do. We will know more over the next few weeks as this all sorts out.

Here is the full FOMC press release statement:

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

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