Yesterday, the Federal Open Market Committee voted 9-to-1 to leave the Fed Funds Rate unchanged, in its target range of 0.000-0.250 percent.

In its press release, the FOMC noted that the U.S. economy “has continued to strengthen” and that the jobs markets “is stabilizing”.  It also said that business spending has “has risen significantly”.

This is a slight departure from the Fed’s January statement in which housing was not mentioned and business spending was said to be “picking up”.

It’s also the sixth straight statement from the FOMC in which the Fed described the economy with optimism. This is a signal to markets that 2008-2009 recession is over and that economic growth is returning.

The economy is not without threats, however, and the Fed pointed out several:

1. High unemployment threatens consumer spending
2. Housing starts are at a “depressed level”
3. Consumer credit remains tight

The message’s overall tone, however, remained positive and inflation was within tolerance limits. We all know that inflation is “mortgage rates’ worst enemy”, so that was a very big sigh of relief for the mortgage bond market.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period” and to end its $1.25 trillion commitment to the mortgage market by March 31, 2010 (yup, a couple weeks away). Fed insiders estimate that the bond-buying program lowered mortgage rates by 1 percent since its start, and after the exit, you should definitely expect mortgage rates to start creeping up.

Why?

Think of it in terms of selling a product. When you have a guaranteed buyer, you’re willing to let your product go for a little less of a markup (wholesale); however, when you MAY get a buyer here or there and nothing is set in stone, you’re going to try and make up for it by marking up the price.

Well, that’s exactly what’s going to happen to mortgage rates when the Fed goes bye-bye and private investors start crawling in wanting more profits.

Mortgage market reaction to yesterday’s Fed press release was, in general, hesitant to make a move and Texas mortgage rates went unchanged. Personally, I floated all clients’ transaction into the meeting, but was standing by to lock ‘n load in case things went south.

Keep an eye out for the FOMC’s next scheduled meeting that’s on April 27-28, 2010 – this puppy’s going to be a 2-day affair, and I think its going to set the pace for where mortgage rates are going to be headed this year.

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Tommy is a senior mortgage consultant with Envoy Mortgage. For a free mortgage consultation, you can email him at
tommy@tr-mg.com. You can also find him on Twitter at @RightMtgGuy.

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