Fed Officials Split

Mar 28 2016

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This week's economic data contained few surprises, and the attacks in Brussels had little impact on U.S. financial markets. As a result, mortgage rates ended the week with little change. 

At the Fed meeting on March 16, nine Fed officials voted in favor of holding the federal funds rate steady and just one supported a rate hike. Fed Chair Yellen suggested that the Fed should proceed cautiously in tightening monetary policy to see the effect of overseas weakness on the U.S. economy.  

Since the meeting, however, several Fed officials have supported tighter monetary policy, sending a mixed message to investors. These officials feel that the performance of the U.S. economy may justify a rate hike as soon as the next Fed meeting on April 27. Investors will be closely monitoring comments from other Fed officials to determine how much support there is for these more hawkish views.

The headline numbers for February home sales released this week were mixed. Sales of existing homes fell 7% from January, while sales of newly built homes showed an increase of 2%. The details show that the fall in existing home sales was from an elevated January level, and the rise of new home sales was from an unusually low level in January. 

Both measures have been volatile lately. An average of home sales over a multiple month period provides a clearer picture of the underlying trend, and the three-month average has shown steady improvement over the last few months. 

Looking ahead, mortgage-backed securities (MBS) markets will be closed tomorrow for Good Friday. Next week, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, Pending Home Sales and Core PCE inflation will be released on Monday. The ISM national manufacturing index will come out on Friday.

Topics: Ali Vafai, The Money Source, The Money Source Inc., mortgage news, employment report, Pink Unicorn, employment rate, home sales, monetary policy, mortgage rates

Fed Changes Guidance

Mar 21 2016

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Wednesday's Fed meeting resulted in positive news for mortgage rates. Mixed economic data released over the past week was roughly neutral. Mortgage rates ended the week lower. 

As expected, the Fed did not change the federal funds rate. However, the statement contained guidance which reduced the expected number of rate hikes in 2016 from four to two. Reasons for this included a downgraded outlook for U.S. economic growth and inflation, as well as concerns about the pace of global economic growth. The statement was good news for mortgage rates, as this guidance pushes tighter monetary policy further into the future, including the expected timeline for the Fed to begin to reduce its large holdings of mortgage-backed securities (MBS) and Treasuries. The added demand for MBS from the Fed helps to keep mortgage rates low. 

Fed officials have stated that they would like to see inflation rise to their target level of 2.0%. After holding steady for most of 2015, core inflation has increased pretty quickly over the last few months. In February, the core consumer price index (CPI), a widely followed inflation measure, unexpectedly rose to an annual rate of 2.3%, the highest level since May 2012. Core inflation excludes the volatile food and energy components. 

However, Fed officials prefer a different monthly indicator, the core PCE price index. This index measures a broader scope of prices and rebalances the category weightings more frequently than CPI. The most recent reading for core PCE showed a 1.7% annual rate in January. The results for February will be released on March 28. Core PCE has generally run about half a point lower than core CPI.

Looking ahead, Existing Home Sales will be released on Monday, and New Home Sales will come out on Wednesday. Durable Orders, an important indicator of economic activity, will be released on Thursday. The third estimate of fourth quarter Gross Domestic Product (GDP) will come out on Friday. 

Topics: The Money Source, economic data, federal fund rate, home sales, GDP, CPI, mortgage rates, new home sales

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