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The Fed holds the line on rates

As widely expected, the Federal Reserve decided to keep the benchmark federal funds rate unchanged.

Following a two-day meeting, the Federal Open Market Committee (FOMC) voted unanimously this week to leave the short-term rate within a target range of 0.75 percent to 1 percent. The FOMC statement downplayed the weak real gross domestic product (GDP) growth of 0.7 percent in the first quarter, and also lower-than-expected nonfarm job additions of 95,000 in March.

interestrateOver recent months, however, job gains have been “solid” and the unemployment rate fell in March, the FOMC statement said, and inflation has been running near the 2 percent  annual target. Although household spending hasn’t increased much, the fundamentals that drive spending are solid.

“The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term,” the statement said.

The FOMC also decided to make no changes to the status of its massive holdings of mortgage-backed securities (MBS) and U.S. Treasuries. The Fed has no intention of unwinding its MBS portfolio — a move that could push up long-term rates — until “normalization of the level of the federal funds rate is well under way,” the policy statement said.

First American’s Chief Economist Mark Fleming said that the FOMC’s future policy decisions on when to allow its MBS holdings to roll off its balance sheet will have a more direct impact on mortgage rates than do incremental increases in the federal funds rate. Longer-term rates track more closely with the 10-year Treasury yield, and don’t typically move precisely with changes to the federal funds rate.  

“While the Fed funds rate steals the headlines, the real news is what the Fed does with the $1.75 trillion dollars of mortgage backed securities that it started buying in 2009 as part of the quantitative easing program,” Fleming said.

“Selling or, more specifically, not continuing to buy MBS reduces demand and directly puts upward pressure on mortgage rates,” Fleming said. “Reducing demand for MBS is how the Fed can directly influence the affordability of mortgages.”

Most analysts weren’t expecting the Fed to pull the trigger on a rate hike in May, but were looking for clues on what the FOMC might do in June, when another 25-basis point increase is considered more likely. Fed Chair Janet Yellen didn’t schedule a news conference after Wednesday’s meeting. Yellen is expected to meet with reporters after the June 13-14 meeting.

The FOMC last raised rates by 25 basis points in March, and most housing economists expect at least two more quarter-percent rate increases in 2017.

“Today’s FOMC decision is only a short-term, temporary pause,” said National Association of Realtors Chief Economist Lawrence Yun. “With no change in monetary policy, mortgage rates look to remain within the narrow band of 4 percent to 4.5 percent for the foreseeable future.”


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