Fed Sees Very Little Change, Leaves Rates Alone
The Federal Open Market Open Committee, as expected, left key interest rates unchanged yesterday.
“The FOMC left their target federal funds rate unchanged at 0-25 basis points, noting that while economic and financial market conditions have begun to improve, the economy is quite weak, and will likely remain so for some time,” said Mortgage Bankers Association Vice President of Research and Economics Michael Fratantoni.
In its statement, the Fed noted that while economic activity “continues to pick up,” particularly the housing sector, other factors such as household spending continues to be constrained.
“The FOMC statement also reiterated that it will complete its commitment to purchase $1.25 trillion of agency MBS by the end of March 2010,” Fratantoni said. “Fed purchases have already begun to taper off, from roughly $25 billion in purchases per week to about $15 billion per week. The Fed also indicated that it will begin to wind down several of their liquidity facilities in early 2010 as scheduled.”
Fratantoni said MBA forecasts mortgage rates to increase as the Fed’s MBS purchase program ends, with the rate on 30-year fixed-rate loans rising to 5.7 percent by the end of 2010.
Below is text of the FOMC statement:
“Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months.
Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth.
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010.
The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.
In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.
The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.