Federal Reserve Archives – Michael Inkman

Fed Lowers Key Interest Rate For First Time Since Great Recession

August 6, 2019 by Michael Inkman

Fed Lowers Key Interest Rate For First Time Since Great Recession The Federal Open Market Committee of the Federal Reserve announced the first rate cut to its key interest rate range since the Great Recession ushered in a series of rate cuts described as “quantitative easing.” The Fed committee confirmed a quarter-point cut to 2.00 to 2.25 percent.

Fed Chair Jerome Powell described the rate cut as a “mid-cycle adjustment” intended as a one-time boost for the economy. Mr. Powell said he did not view the cut as the first in a series of quantitative easing moves, but analysts said single rate cuts are not common.

The FOMC post-meeting statement said the decision to cut rates was based on global and domestic economic developments prompted by recent trade wars and resulting uncertainties. The Fed also cited inflation concerns connected with its dual mandate of maintaining maximum employment and stable pricing, but did not indicate urgency in its decision to reduce its benchmark rate range.

No Commitment to Future Rate Cuts

The FOMC statement did not commit to future rate cuts, but said that committee members would “continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion with a strong labor market and inflation near its symmetric two percent objective.” Mr. Powell said, “If you look overall, financial stability vulnerabilities are moderate.” Eight of ten FOMC members voted in favor of the rate cut.

Projections for future cuts varied, as the Fed gave no guarantees of further rate cuts and economists predicted one more rate cut in 2019. Bond market analysts expected three rate cuts this year, which was factored into bond pricing.

The Fed also announced it was ending is efforts to shrink its balance sheet and that it was important for the Fed to buy Treasury bonds in the open market as mortgage assets move out of the Fed’s balance sheet. This move was expected to stabilize the market.

The FOMC statement concluded with the Committee’s consistent commitment to assess real and expected economic developments and to review global and domestic developments along with readings on economic and financial trends as part of its decision-making process. The FOMC outlook is flexible and subject to change as events warrant.

Fed Meeting Statement Positive For Ongoing Mortgage Sector Support

August 1, 2013 by Michael Inkman Leave a Comment

Fed Meeting Statement Positive For Ongoing Mortgage Sector Support

There was potentially good news for mortgage rates on Wednesday as the Fed’s Federal Open Market Committee (FOMC) announced that its quantitative easing (QE) program would remain unchanged for the present.

Economists expect the Fed to begin tapering the amount of QE toward the end of the year in accordance with Chairman Ben Bernanke’s previous statements that “tapering” would likely begin near year-end.

No specific date for reducing the QE assets purchases was given.

Chairman Bernanke has previously indicated that the Fed will closely review domestic and global economic developments as part of its decision-making process for changing the QE program. Wednesday’s FOMC statement reaffirmed this plan.

Fed Cites Economic Expansion and Improving Labor Conditions

The FOMC statement cited modest economic expansion, improving labor markets and continued high unemployment levels as a basis for continuing its current level of QE.

The Fed’s mandate requires it to support price stability and low unemployment; reversals in these or other economic areas could cause the Fed to continue its QE at present levels. At present, economists expect QE to end in mid-2014.

The FOMC statement also indicated that the target federal funds rate will remain between 0.00 and 0.25 percent at least until the national unemployment rate falls to 6.50 percent. Chairman Bernanke did not give a press conference after Wednesday’s statement was released.

Quantitative Easing: Monthly Purchase of MBS, Treasury Securities Intended to Control Mortgage Rates

The Fed currently purchases $40 billion in mortgage-backed securities (MBS) and $45 billion in Treasury securities monthly. These purchases are intended to control long-term interest rates including mortgage rates.

When the Fed begins tapering and eventually concludes these asset purchases, demand for MBS and Treasury securities are expected to fall and their prices will likely fall as well. When prices for bonds include MBS fall, mortgage rates traditionally rise.

With mortgage rates recently moving up, reducing the level of the Fed’s QE asset purchases is cause for concern. Higher mortgage rates make homes less affordable; the combination of rising home prices and mortgage rates presents challenges for first-time home buyers and others without sufficient funds for meeting higher down payments and monthly mortgage payments.

Now would be a very good time to ask your trusted mortgage professional for a personal review of your mortgage situation. Give them a call and ask for your private assessment today.

FOMC Minutes Reveal Fed May Curb Economic Support Program Before Year End

July 11, 2013 by Michael Inkman Leave a Comment

FOMC Minutes Suggest QE Tapering by Year-End

The minutes for June’s meeting of the Federal Open Market Committee (FOMC) suggest that committee members are mostly in agreement that the current quantitative easing program (QE) should begin winding down by year end, but the committee minutes are very clear concerning the committee’s intention to monitor inflation and ongoing economic and financial developments before taking action to reduce the current rate of QE.

The Fed currently purchases $85 billion monthly in Treasury securities and mortgage-backed securities (MBS). Investors fear that if the Fed rolls back QE too soon or too fast, it could cause long term interest rates such as mortgage rates to rise faster.

The Fed minutes indicate that factors the Fed will continue monitoring before making changes to QE include:

Labor market conditions
Indicators of inflationary pressures
Readings on financial developments

FOMC members also agreed that the Fed would not sell MBS it has accumulated after the economic support program ceases. When the Fed ceases QE, demand for mortgage-backed securities is expected to fall. If the Fed were to sell off MBS holdings in addition to stopping QE, MBS prices could fall sharply. In general, when MBS prices fall, mortgage rates rise.

The FOMC minutes indicate that the Fed intends to maintain the Federal Funds rate at 0.000 to 0.250 percent “for a considerable time after the monthly asset purchases cease.” To be clear, the minutes do not reveal any specific dates for starting to wind down the program.

Concerns over financial conditions in Europe highlight the Fed’s intention to monitor global economic developments were discussed. Potential “spillover” of negative sentiments in response to Europe’s economic woes to U.S. financial markets were seen as a potential threat to the U.S. economic recovery.

Committee members found that although the economy showed moderate improvement since its last meeting, the national unemployment rate remains high at 7.60 percent. Members also noted that the numbers of long-term unemployed and those working part time jobs but wanting full time jobs remain higher than average. These conditions traditionally keep consumers from buying homes.

Housing: Upside-Down Mortgages Decreasing

Due to rapid increases in home values, the committee noted that fewer homeowners were under water on their mortgage loans. This is good news as homeowners can rebuild household wealth as their home equity increases. Having home equity also provides homeowners with the flexibility to sell or refinance their homes.

While housing is driving the economic recovery, high unemployment will likely keep the Fed from changing its QE policy in the short term.

Now may be a very good time to take advantage of still historically low mortgage interest rates before they rise. If you have specific questions on purchasing or refinancing your home mortgage loan and how these changes may affect you, please contact your trusted mortgage professional today.

The Federal Open Market Committee Holds Steady With Mortgage Backed Security Investments

June 21, 2013 by Michael Inkman Leave a Comment

The Federal Open Market Committee (FOMC) of the Federal Reserve decided to continue its current policy of quantitative easing (QE) based on current economic conditions. The Fed currently purchases $40 billion in mortgage-backed securities (MBS) and $45 billion in Treasury securities monthly.

Objectives for the QE program include:

Keeping long term interest rates, including mortgage rates, low
Supporting mortgage markets
Easing broader financial conditions

FOMC repeated its position of evaluating QE policy based on inflation, the unemployment rate and economic developments.

Members of the FOMC determined that keeping the federal funds rate between 0.00 and 0.25 percent until the following conditions are met:

National unemployment rate reaches 6.50 percent
Inflation is expected not to exceed 2.50 percent within the next one to two years
Longer term inflation expectations are “well-anchored.”

Committee members agreed to consistently review labor market conditions, inflationary pressures and expected rates of inflation and other financial developments for determining their course of action on QE.

In its post-meeting statement, FOMC asserted that any changes to current QE policy would be taken in consideration of longer range goals for maximum employment and an inflation rate of 2.00 percent.

Fed Chairman Gives Press Conference

After the FOMC statement, Fed Chairman Ben Bernanke held a press conference which provided details about the future of QE and how the Fed will “normalize” its monetary policy. Chairman Bernanke noted that as QE is reduced and eventually stopped, the Fed will not be selling its MBS holdings.

This is important, as demand for MBS is connected to how mortgage rates perform. If the market is flooded with MBS, demand would slow, and prices would fall. When MBS prices fall, mortgage rates typically rise.

According to Chairman Bernanke, the FOMC does not see any immediate reason for changing its purchase of Treasury securities and MBS in the near term, but will continue to monitor conditions. Using the analogy of driving a car, the chairman indicated that the Fed’s intent regarding QE and the federal funds rate would be better compared to easing up on the accelerator rather than putting on the brakes.

Chairman Bernanke also characterized benchmarks cited in connection with increasing the federal funds rate as “thresholds, and not triggers.” This suggests that even if national unemployment and inflation reach Fed targets, that other economic conditions occurring at that time could cause the Fed to alter its plan for raising the federal funds rate.

The Fed chairman said that during Wednesday’s FOMC meeting, 14 of 19 participants did not expect changes to the federal funds rate until 2015, and one member didn’t expect a change until 2016.

Fed Meeting Minutes Expose Rising Interest Rate Risk

May 23, 2013 by Michael Inkman Leave a Comment

Fed Meeting Minutes Expose Rising Interest Rate Risk Minutes of the April/May Federal Open Market Committee (FOMC) recently released may have a significant impact on mortgage rates going forward. One significant development from the meeting suggests that the present quantitative easing (QE) program may be modified in the near future.

The current QE program involves the Fed purchasing $85 billion per month in mortgage backed securities (MBS) and Treasury bonds. The Fed’s goal with QE is keeping long-term interest rates, including mortgage rates, low.

Considerations mentioned in favor of slowing the current QE program include concerns over “buoyant” financial markets as evidence of a developing economic “bubble”. FOMC members in favor of continuing the current easing program cited fears of economic deflation resulting from cutbacks in QE.

Fed Chief Calls Current Bond Buying Program “Overheated”

In related news, Fed chairman Ben Bernanke, in testimony before Congress, characterized the current QE program as “overheating the economy,” but he also stated that slowing economic growth is a worse alternative than continuing the current QE program. Chairman Bernanke noted that QE is supporting financial markets and the economy and indicated that it is not time to reduce the Fed’s support.

Diverse opinions within the FOMC added to the impasse over QE, as one member advocated for immediate tapering of the QE program, while another proposed expanding QE purchases.

The FOMC noted a number of challenges including the national unemployment rate of 7.60 percent at the end of March, that private sector hiring plans were “subdued,” and that jobless claims had trended up during the inter-meeting period. Among numerous economic positive statistics cited, the Fed noted that consumer spending improved and was driven by higher automotive sales and a drop in fuel prices.

The FOMC minutes reflect that some members had concerns about the ability of consumer spending to hold without notable improvement in hiring and business investment. Businesses contacts of FOMC members were reluctant to plan additional hiring and investing in their businesses based on reports of decreased manufacturing and lower international demand for products.

Good News Revealed About Low Future Inflation Expectations

The Fed predicted modest inflation over the medium term, and expected inflation to remain subdued until 2015. The Fed will maintain its benchmarks for adjusting the Federal Funds Rate and QE based on the national unemployment rate reaching 6.50 percent and the inflation rate reaching 2.00 percent.

The FOMC characterized the improving housing market as responsible for economic improvements for related businesses, but also acknowledged that increasing demand for housing was being caused by low inventories of available homes rather than buyer enthusiasm alone.

Improving home prices and easier consumer credit terms were viewed as contributing to improvement in overall economic conditions. These factors increase household cash flow and provide consumers with more discretionary income for spending.

While the FOMC members did not agree on how or if to revise their current QE policy, it seems likely that the next meeting will bring increased scrutiny of QE and its impact on current economic conditions.

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