Monday, March 15, 2010

Mortgage investors are nervously awaiting tomorrow's Federal Open Market Committee meeting. In the run-up to this event traders' are once again engaged in the traditional handwringing and floor pacing - an exercise that will likely once again prove to be much ado about nothing.



With a national jobless rate of 9.7% and inflation pressures not even registering a "blip" on policymakers' radars it is almost a certainty that the Fed will leave their benchmark short-term interest rates unchanged. That much is essentially a "given" as far as mortgage investors are concerned. The real question, and the major source of anxiety for some, revolves around the phrasing of the Fed's post-meeting statement.



The vast majority of market participants expect the members of the Federal Open Market Committee to repeat their pledge to keep their benchmark short-term interest rates exceptionally low for an "extended period". Mortgage investors interpret that phrase - which the Fed has used in every post-meeting statement since March 2009 - as a signal that the first rate-hike is still several months away. If the "extended period" phrase is still prevalent in the post-meeting communiqué from the Fed - mortgage interest will likely show little reaction to this event.



It is worth noting some pressure is developing within the committee to temper the "extended period" language by substituting something vaguer like "near-term or sometime yet". All this fuss surrounding the phraseology of the Fed's post-meeting statement probably appears to be nothing more than an exercise in splitting hairs - especially if the central bankers do indeed leave their benchmark rates unchanged. Even so, you can be almost certain that the upward pressure on mortgage interest rates will increase notably if tomorrow's post-meeting statement from the Fed contains this otherwise small phrasing change.



After the greatest financial upheaval in nearly a century, the Fed is almost certain to go to great lengths to avoid agitating market participants with surprise shifts in their guidance regarding monetary policy - making a meaningful change to the primary text of the tomorrow's post meeting statement a low probability outcome -- but not so small as to be discounted completely. Pay attention here.