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The Federal Open Market Committee (FOMC) of the Federal Reserve decided to continue its current policy of quantitative easing (QE) based on current economic conditions. The Fed currently purchases $40 billion in mortgage-backed securities (MBS) and $45 billion in Treasury securities monthly.

Objectives for the QE program include:

Keeping long term interest rates, including mortgage rates, low
Supporting mortgage markets
Easing broader financial conditions

FOMC repeated its position of evaluating QE policy based on inflation, the unemployment rate and economic developments.

Members of the FOMC determined that keeping the federal funds rate between 0.00 and 0.25 percent until the following conditions are met:

National unemployment rate reaches 6.50 percent
Inflation is expected not to exceed 2.50 percent within the next one to two years
Longer term inflation expectations are “well-anchored.”

Committee members agreed to consistently review labor market conditions, inflationary pressures and expected rates of inflation and other financial developments for determining their course of action on QE.

In its post-meeting statement, FOMC asserted that any changes to current QE policy would be taken in consideration of longer range goals for maximum employment and an inflation rate of 2.00 percent.

Fed Chairman Gives Press Conference

After the FOMC statement, Fed Chairman Ben Bernanke held a press conference which provided details about the future of QE and how the Fed will “normalize” its monetary policy. Chairman Bernanke noted that as QE is reduced and eventually stopped, the Fed will not be selling its MBS holdings.

This is important, as demand for MBS is connected to how mortgage rates perform. If the market is flooded with MBS, demand would slow, and prices would fall. When MBS prices fall, mortgage rates typically rise.

According to Chairman Bernanke, the FOMC does not see any immediate reason for changing its purchase of Treasury securities and MBS in the near term, but will continue to monitor conditions. Using the analogy of driving a car, the chairman indicated that the Fed’s intent regarding QE and the federal funds rate would be better compared to easing up on the accelerator rather than putting on the brakes.

Chairman Bernanke also characterized benchmarks cited in connection with increasing the federal funds rate as “thresholds, and not triggers.” This suggests that even if national unemployment and inflation reach Fed targets, that other economic conditions occurring at that time could cause the Fed to alter its plan for raising the federal funds rate.

The Fed chairman said that during Wednesday’s FOMC meeting, 14 of 19 participants did not expect changes to the federal funds rate until 2015, and one member didn’t expect a change until 2016.

Fed Meeting Minutes Expose Rising Interest Rate Risk Minutes of the April/May Federal Open Market Committee (FOMC) recently released may have a significant impact on mortgage rates going forward. One significant development from the meeting suggests that the present quantitative easing (QE) program may be modified in the near future.

The current QE program involves the Fed purchasing $85 billion per month in mortgage backed securities (MBS) and Treasury bonds. The Fed’s goal with QE is keeping long-term interest rates, including mortgage rates, low.

Considerations mentioned in favor of slowing the current QE program include concerns over “buoyant” financial markets as evidence of a developing economic “bubble”. FOMC members in favor of continuing the current easing program cited fears of economic deflation resulting from cutbacks in QE.

Fed Chief Calls Current Bond Buying Program “Overheated”

In related news, Fed chairman Ben Bernanke, in testimony before Congress, characterized the current QE program as “overheating the economy,” but he also stated that slowing economic growth is a worse alternative than continuing the current QE program. Chairman Bernanke noted that QE is supporting financial markets and the economy and indicated that it is not time to reduce the Fed’s support.

Diverse opinions within the FOMC added to the impasse over QE, as one member advocated for immediate tapering of the QE program, while another proposed expanding QE purchases.

The FOMC noted a number of challenges including the national unemployment rate of 7.60 percent at the end of March, that private sector hiring plans were “subdued,” and that jobless claims had trended up during the inter-meeting period. Among numerous economic positive statistics cited, the Fed noted that consumer spending improved and was driven by higher automotive sales and a drop in fuel prices.

The FOMC minutes reflect that some members had concerns about the ability of consumer spending to hold without notable improvement in hiring and business investment. Businesses contacts of FOMC members were reluctant to plan additional hiring and investing in their businesses based on reports of decreased manufacturing and lower international demand for products.

Good News Revealed About Low Future Inflation Expectations

The Fed predicted modest inflation over the medium term, and expected inflation to remain subdued until 2015. The Fed will maintain its benchmarks for adjusting the Federal Funds Rate and QE based on the national unemployment rate reaching 6.50 percent and the inflation rate reaching 2.00 percent.

The FOMC characterized the improving housing market as responsible for economic improvements for related businesses, but also acknowledged that increasing demand for housing was being caused by low inventories of available homes rather than buyer enthusiasm alone.

Improving home prices and easier consumer credit terms were viewed as contributing to improvement in overall economic conditions. These factors increase household cash flow and provide consumers with more discretionary income for spending.

While the FOMC members did not agree on how or if to revise their current QE policy, it seems likely that the next meeting will bring increased scrutiny of QE and its impact on current economic conditions.

The Federal Open Market Committee Holds Steady With Mortgage Backed Security Investments

Fed Meeting Minutes Expose Rising Interest Rate Risk

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