Wednesday, December 16, 2009

The Federal Reserve is expected to stick to its mortgage market friendly monetary policy strategy when it wraps up its two-day meeting this afternoon at 2:15 p.m. ET.


Most analysts believe policymakers will be very hesitant to pull the plug on low interest rates too quickly due to persistent weakness in the labor sector, tight lending conditions at both the business and consumer levels, and a non-threatening inflation environment.


This morning's earlier news from the Labor Department indicating consumer prices rose a modest 0.4% in November while the more important core rate (a value that excludes the more volatile food and energy components) remained unchanged from month earlier levels - made the Fed's interest rate decision just a little bit easier. This morning's benign inflation reading at the consumer level went a long way toward tamping down budding inflation fears spurred by yesterday's stronger-than-expected uptick in November Producer Price index data series. For those still wringing their hands about inflation threats it is worth noting that the Fed's long-term forecast for their preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.8% to 2.0%. That gauge, which is typically lower than the Consumer Price Index, was a mere 1.4% in the 12 months to October.


The "so what" factor here is significant. Amid tame inflation and elevated unemployment, the probabilities are extremely high the members of the Federal Open Market Committee will reaffirm their commitment to extremely low interest rates for an extended period. The committee will likely note the recent improvement in household spending and industrial production, but it will not likely use November's unexpected improvement in nonfarm payrolls to revise its overall economic and inflation outlook for its monetary stance. If this assessment proves accurate, the traditional post-meeting statement from the Fed (expected at 2:15 p.m. ET) will likely be mortgage interest rate neutral.


Any hint that the central bank is considering backing off of its asset purchase programs, or perhaps mulling an increase in its benchmark short-term interest rates will likely send mortgage interest rates notably higher. While it is worth noting this risk exists - the probability of such an outcome is exceptionally low.


In other news of the day, the Mortgage Bankers of America said mortgage applications nudged 0.3% higher during the week ended December 11th. Purchase applications fell 0.1% while refinance requests climbed 0.9%. The refinance share of mortgage activity increased to 75.2% of total applications from 74.4% last week. The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.9% up 0.4% from the previous week. The rate remained above the all-time low of 4.61% set in the week ended March 27 - but well below well below the year-ago level of 5.18%.