It’s Fed Day again! Every six weeks, the Federal Reserve Board meets to discuss current economic conditions and changes to their economic policies. Today is their second day of their two day meeting, and this afternoon they will announce their conclusions. It is fully expected that the Fed will announce another $10 billion per month taper to Quantitative Easing. This will bring the total reduction of the original $85 billion per month down to $55 billion. So far, the markets have responded well to the reduction in asset purchases, with mortgage rates lower today than they were just prior to the taper and the stock market reaching all-time highs since. Of course, the major damage to interest rates occurred when the thought of taper was introduced, so most of the impact was already priced into the bond market. As for the stock market, well, that seems to have a mind of its own right now….
Home purchases have yet to improve, with purchase applications showing a decline from last week to this week. Many experts expected the home purchase market to improve as the weather thawed. Although poor weather seemed to be an overused excuse for poor economic conditions, we do anticipate the purchases market to improve as we move into the spring and summer months. However, home purchases are down 15% from where they were just 12 months ago, so it is clear that higher interest rates and home values have adversely impacted the market.
Mortgage bonds are sandwiched between the 25 and 50 day moving averages. The Fed statement may push bonds out of this current range, one way or the other. With history showing that the bond markets typically fall on Fed days, we are going to take the safe play and suggest a locking bias. If you choose to float into the release of the Fed Meeting Minutes, watch closely at 12:00 pm. If markets react poorly, locking will certainly be the safe play at that point.