Posted: August 10, 2010 in Uncategorized





Today’s FOMC meeting has adjourned with no change to key short-term interest rates. However, the post-meeting statement did give us a bit of a surprise that was quite favorable to the bond market and mortgage rates. In the statement the Fed indicated that they expect the economy to grow at a slower pace than estimated at the last FOMC meeting in late June. They renewed their “subdued” outlook for inflation, which is the key point for the bond market and the indication that they expect to keep key interest rates at their current level for an “extended period.” That leads market participants to believe that the Fed is still concerned about the economy’s ability to expand and maintain momentum.


The surprise came from an announcement that the Fed will use funds from its holdings in mortgage bonds to buy more government debt. What this means is that the Fed is taking its interest payments and reinvesting them into the economic recovery. This will be a much smaller campaign than we saw from them last year and early this year, but it is still considered good news. The goal is to help keep long-term interest rates low, such as home mortgage rates and corporate bond rates, in an effort to spur more spending and economic activity. The general consensus is that the impact this will have on the economy is minimal, but it does show that the Fed is attentive to current conditions and is ready to take more measures if needed.


The financial markets have rallied after the announcement was made, particularly bonds. The stock markets erased a good part of their earlier losses, while the bond market extended its morning gains. The Dow is currently down 38 points and the Nasdaq is down 22 points. The bond market is currently up 20/32, which should improve mortgage rates by approximately .125 – .250 of a discount point from this morning’s rates.


Second quarter Employee Productivity and Costs data was released early this morning. It revealed a surprising 0.9% decline in worker productivity. This means that employees were less productive during the quarter than many had thought. That can be considered bad news for bonds, but offsetting that surprise was a much smaller than expected increase in labor costs. They rose 0.2% compared to the 1.4% rise that was forecasted, which means that employer costs for wages rose at a slower pace than expected. That can be considered good news for the bond market and mortgage rates because rising costs translates into higher prices for products at the consumer level and gives workers more money to spend, fueling economic activity.


Tomorrow’s only data will be June’s Trade Balance report at 8:30 AM ET. It gives us the size of the U.S. trade deficit but is the week’s least important report and likely will have little impact on the bond market and mortgage rates. Analysts are expecting to see a $42.5 billion deficit, but it will take a wide variance to directly influence mortgage pricing.


If I were considering financing/refinancing a home, I would…. Float if my closing was taking place within 7 days… Float if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now…


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