It’s a virtual certainty that the Fed will not monkey with short term rates at the conclusion of this weeks meeting. But don’t be fooled. Just because they aren’t going to alter the Federal Funds rate does not mean that mortgage rates won’t be effected.
That’s because the Fed will also issue a policy statement. That document, in addition to giving the usual Fed take on the economy and the likely direction of monetary policy (read: interest rates) often contains Fedspeak on other hot topics economic, fiscal, and otherwise.
Among the hottest topics right now is the Fed’s participation in the secondary mortgage market, where mortgage-backed bonds are bought and sold, and where ultimately, rates are determined. To date, the Fed has purchased something like $900 Billion dollars worth of mortgage bonds – no mean sum – and it is the reason that mortgage rates are closer to 5% than 6%.
The program was originally intended to wind down in December, after $1.25 trillion dollars worth of purchases – at which point (one hoped) the housing and mortgage markets would have recovered to the point where massive intervention was no longer necessary. I don’t think we are there yet.
So the question is: what will the Fed say about this program? Will it end abrubtly, casuing mortgage rates to rise? Will they gradually wean the market off of artificially low mortgage rates over time? Will they leave the door open for more money and more intervention in these markets? Will they ignore the question entirely, and address it in a future meeting?
Hard to say, but my money is on either a gentle unwind or a non-statement statement that kicks the tough decision into the next meeting, where there will be more data with which to assess the health of the housing and mortgage markets.
Either way, I will be watching this issue closely, and if you are in the market for a mortgage, you should be too.