Fed Day: It’s Not What They Do, but What They Say

by Alex Stenback on June 25, 2008

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Today, at 2:15 EST, the Federal Open Market Committee wraps a two day meeting with a rate decision and a policy statement.

It is a foregone conclusion that the Committee members will vote to keep the Federal Funds rate and the Discount rate unchanged at 2% and 2.25%, respectively.

To the casual observer, hearing news that the Fed has kept rates steady might lead you to conclude that mortgage rates will stay the same.

But for those of us watching mortgage rates, what the Fed does doesn’t matter.  The Fed does not control mortgage rates, but how the Fed handles monetary policy, and other economic concerns, can influence mortgage rates a great deal

So it’s what the Fed says in the accompanying policy statement that counts, and can send mortgage rates careening in one direction or another.

That’s because the policy statment, in addition to articulating the rationale behind the Fed’s rate decision, also is peppered with clues as to the Fed’s outlook on the economy and their stance, or position, on future rate activity.

It is this outlook that can drive mortgage rates, and often not in the direction you’d expect.

For instance, as recent public comments by Fed officials, and the Fed Funds Futures Market suggest, if the Fed begins to raise rates because inflation is a growing threat to the economy, one might think that this would cause mortgage rates to rise. 

That would be the wrong conclusion. In fact, the Fed "signaling" a return to rate hikes later this year may actually (surprisingly?) help mortgage rates. 

Why?  One word: Inflation.  It’s everywhere you look, and perhaps more importantly, the expectation that it will continue has caused mortgage rates to rise.  So the Fed going into inflation fighting mode (AKA rate hikes) should allay these inflation expectations, and allow mortgage rates to fall.

Or that’s one theory anyway.

Whether or not the Fed actually sends this signal, or the market interprets as much from their famously obtuse policy statements is another matter.  We’ll report more later today.

In the mean time, here’s a couple of posts on the topic that caught our eye:

Economy to Fed: I Thought I Told You to Remain on the Command Ship [Accrued Interest]

Food for Thought on the Big Picture and Inflation Ahead of the Fed [Interest Rate Roundup]

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