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The Fed Translated…..

Tom here….  Sorry for the delay, but better late than never….. (my comments are in bold)

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. Nothing new there and no surprises.  Can’t go lower than zero and certainly can’t raise them right now. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. Here again, no big surprises.  I think the surprise is going to be the amount that rates go up once the economy does recover and inflation becomes an issue.   I’ve been talking to a large number of people who want to use a home equity line (at prime or prime minus .5%) to pay off their mortgage.   They would lower their rate down to around 3%, but my recommendation would be to do that only if they can plan on paying the balance off within 1 to 3 years.   My feeling is that any longer term than that will make it too expensive because of the way rates are going to jump up.   For more thoughts on that, see what I wrote a couple of weeks ago about the “W” recovery.

Information received since the Committee met in December suggests that the economy has weakened further. No surprise there. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, Really?  Which ones? in part reflecting government efforts to provide liquidity and strengthen financial institutions; If you look at Bank of America and Citi, you can’t tell that the financial institutions are stronger, nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. Translated – we hope things get better later this year, but we really don’t know, so don’t blame us if it takes longer.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. Inflation could persist below rates that foster growth.   What does that mean?  That means that deflation is more of an issue than inflation.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. We’ll do everything we can! The focus of the Committee’s policy is to support the functioning of financial markets We’ve got to get the banking world moving or we’re in really big trouble! and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. They say this like it’s a good thing but a high level of the Fed’s balance sheet isn’t a good thing. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. We’re buying mortgages in order to keep Fannie and Freddie going and to try to lower rates. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. Read that last sentence carefully.   Does improve conditions in private credit markets mean lower rates?   Not necessarily.   It means that if the Treasury market and associated credit markets seize up, the Fed will buy Treasuries to keep things moving.

The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

FRB: Press Release–FOMC statement–January 28, 2009.

Summary – The Fed essentially said, “They’ll do what they can” to keep the markets moving and to get the economy back on track.   They didn’t say that they were buying any particular assets to lower mortgage rates or lower any other costs of credit.  They will do what they can to keep credit moving but they aren’t promising that what they are doing will lower rates.

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  • 8 comments

    8 Comments so far

    1. James Boyer January 30th, 2009 9:56 pm

      Well, they need to start kicking some… and buying up some stuff.

    2. David Shafer January 31st, 2009 8:28 am

      Tom, many home equity lines include the option to switch to a fixed rate, mine does. My line is prime -1% and allows me to fix the rate on any portion of the line at market rates up to four times. So, when the move up begins for the fed I can switch to a fixed rate amortizing loan at no cost! So, for several years I get to enjoy an incredibly low rate and when interest rates start their move up, then I fix it with a historically low rate!

    3. Tom Vanderwell January 31st, 2009 9:22 am

      David,

      Read the fine print on your home equity loan. Yes it does have the option to fix in the interest rate. However, the fine print shows that you can lock in at the current fixed rate, not at the rate that you are at. So, you might be at 2.25% right now, but if you wanted to lock in, the rate might be 7.5%. Fixed rates on home equity loans right now are extremely high relative to the rest of the market due to the falling property values and the fact that many of them are now essentially unsecured loans.

      Check what yours would adjust to and let me know. I’d be curious.

      Thanks!

      Tom

    4. David Shafer January 31st, 2009 9:58 am

      Tom, yes I am aware of that and guess I didn’t make it clear in my post. I could fix it around 5.25% now, but expect it to go up as the mortgage bond market goes up. Even if I fix it at 6.5% it is still historically on the low side for mortgage interest! Admittedly it is a strategy that forces one to pay attention to interest rates, but I believe most people should do that anyway! Yes, they should always read the fine print from those pesky banks! Just kidding about the bank part, you should always read the fine print of any contract.

    5. Robert Kerr January 31st, 2009 4:51 pm

      I enjoy reading your translations, Tom. Spot on, IMO. Keep up the good work.

    6. Sean Purcell January 31st, 2009 5:46 pm

      Tom,

      I think the surprise is going to be the amount that rates go up once the economy does recover and inflation becomes an issue.

      I think inflation will become more than an “issue.” As a matter of fact, when inflation hits full stride I think we will look back on this recession fondly. How high and when? I’ll show you mine if you show my yours… first. :) What are your predictions for inflation and when will it begin to rear its ugly head?

    7. Tom Vanderwell February 1st, 2009 11:57 am

      Robert,

      Thank you!

      Sean,

      I’ll do that, but that will need to be a totally different post and with everything I’ve got going on at the moment, it might have to wait a week or so.

      In the mean time, take a look at what I wrote over at Straight Talk about it at:

      http://straighttalkaboutmortgages.com/2009/01/21/dubya/

      And no the Dubya doesn’t refer to the former President…..

      Tom

    8. Jose Lopez February 2nd, 2009 9:00 pm

      Lets see what happens with this new congress. There are a lot of ideas floating around out there right now. Just today, there is talk that the republicans are putting together a plan to assist homeowners. Let see what it looks like…

      Sarasota Foreclosures