Tuesday, March 16, 2010

The mortgage market is idling this morning as investors nervously await the release of the Federal Open Market Committee's post-meeting statement scheduled for 2:15 p.m. ET this afternoon.


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 today - mortgage interest rates 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 a more puzzling phrase 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 today's post-meeting statement from the Fed contains this otherwise small phrasing change.


Last but certainly not least, policymakers will likely use their post-meeting statement to remind market participants that March 31st is still the targeted end-point of the $1.25 trillion dollar direct purchase program for mortgage-backed securities. As of last Thursday the Fed had spent $1.22 trillion of this total allocation. The jury is still out on the question of how big an impact the conclusion of this program will have on the current level of mortgage interest rates - but most recent models suggest the direct consequence of this single event will probably be limited to an uptick in note rates of 25 basis-points or less.


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 today's post meeting statement a low probability outcome -- but not so small as to be discounted completely. Pay attention here.


Almost going unnoticed as mortgage investors focus on this afternoon's event was a report this morning from the Commerce Department indicating housing starts and building permits both fell last month - as a consequence of sharp decline in the multifamily sector. The government said overall housing starts were down 5.9% while building permits slumped 1.6%, dropping for a second straight month.


The news here is a bit deceptive -- on a year-over-year basis single-family housing starts are up 39% while single-family building permits are up 32.0% compared to February 2009. While the trend trajectory for homebuilders is headed in the right direction -- it is still going to be a slow recovery for new home construction until the economy begins creating jobs strongly and consistently enough to restore prospective homebuyers confidence in the overall sustainability of the economic recovery. And that is a condition experts suggest is unlikely to develop for another six to twelve months yet.