Tag Archives: Operation Twist

Wednesday, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

The vote was nearly unanimous, with just one dissenting voter. There were 3 dissenters at each of the FOMC’s last two meetings.

In its press release, the Federal Reserve presented an improved outlook for the U.S. economy, noting that since its last meeting in September, there’s new evidence that the economy “strengthened somewhat” in the third quarter.

One example cited is that consumer and business spending continues to rise while inflationary pressures on the economy remain modest. This indicates controlled growth — a plus in a recovering economy.   

The economy remains slowed by a number of factors, though, as noted by the Fed :

1. “Continuing weakness” in the labor market
2. Softness in commercial real estate
3. A “depressed” housing market

In response to mixed economic conditions, the FOMC opted to “do nothing” today; it introduced no new monetary policy, and revised none of its existing market stimulus. The Fed re-iterated its plan to leave the Fed Funds Rate in its current range near 0.000 percent “at least until mid-2013″ and affirmed “Operation Twist” — the program in which the Fed sells Treasury securities with a maturity of 3 years or less, and uses the proceeds to buy mortgage bonds with maturity between 6 and 30 years.

Mortgage market reaction to the FOMC statement has been negative this afternoon. Mortgage rates throughout Pennsylvania are rising because analysts expected the Fed to launch new, bigger stimulus plans. It didn’t. Rates may drift higher for the new few days, too.

Therefore, it today’s mortgage rates fit your household budget, consider locking in a mortgage rate. Mortgage rates are very low right now, relative to history. It may not last.

The FOMC’s next meeting — its last scheduled meeting of the year — is December 13, 2011.

The Federal Open Market Committee begins a scheduled, 2-day meeting today, the seventh of its 8 scheduled meetings this year, and the eighth Fed meeting overall.

The FOMC is a 12-person sub-committee within the Federal Reserve. It’s the group responsible for setting the nation’s monetary policy and is led by Federal Reserve Chairman Ben Bernanke.

The FOMC’s most well-known role is as the steward of the Fed Funds Rate. This is the overnight rate at which U.S. banks borrow money from each other. The Fed Funds Rate is a unique, “banking” interest rate, and should not be confused with consumer interest rates, a category which includes “mortgage rates”.

Mortgage rates are not set by the Federal Reserve. 

Rather, mortgage rates are based on the price of mortgage-backed bonds. If mortgage rates correlated to the FOMC’s Fed Funds Rate, the chart at right would be linear.

That said, the FOMC does exert influence on mortgage markets.

After its FOMC meetings, the Federal Reserve issues a press release to the public. In it, the central banker summarizes economic conditions nationwide, highlighting threats to the economy and areas of strength.

When the Federal Reserve’s statement is generally “positive”, mortgage rates tend to rise. This is because a strengthening economy invites investors to assume more risk, spurring equity markets at the expense of all bonds types, including the mortgage-backed kind.

When bond markets lose, mortgage rates rise.

Conversely, when the Fed is generally negative, bond markets gain, pushing mortgage rates lower throughout Pennsylvania.

The Fed can also influence mortgage rates via new policy.

At its last meeting, the FOMC launched a new, $400-billion round of mortgage-market stimulus known as Operation Twist. The added mortgage-bond support led mortgage rates lower post-FOMC meeting. 

The Fed may expand Operation Twist as soon as Wednesday afternoon. It may also take no such steps at all. Unfortunately, there are few clues about what the Federal Reserve may do next, if anything at all. As a result, mortgage rates will be a moving target for the next 36 hours. First, they’ll be volatile before of the Fed’s statement. Then, they’ll be volatile after the Fed’s statement.

Even if the Fed does nothing, mortgage rates will change so your safest play is to lock a mortgage rate ahead of Wednesday’s 2:15 PM ET adjournment.

There too much risk in floating.