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Below are our excerpts of key elements from Fed minutes from their last FOMC meeting on December 15-16. The excerpts cover the following: Fed’s view on whether economic recovery will last, support for tame inflation even with volatile energy prices, bank standards to remain tight because of commercial real estate strains, and jobless rate likely to remain near current 10% level. Perhaps most important, the Fed minutes also suggest banks could ease credit standards and also re-enter the private MBS market as economy improves. This would help ease long-term mortgage rate pressure caused by end of Fed’s MBS purchasing, but could also lead to inflation which would cause Fed to hike short rates.

Will the economic recovery continue?: more…

The Fed kept the overnight bank-to-bank Fed Funds Rate target at 0-.25% and Fed-to-bank Discount Rate at .5%. They changed their language ever so slightly about the economy from “likely to remain weak for some time” to “likely to remain weak for a time” and following that by saying they expect fiscal and monetary stimulus to eventually strengthen the economy and they’d adapt “in a context of price stability” meaning that they’d raise rates to avoid inflation as necessary. But they did keep their language that they expect inflation “will remain subdued for some time.”

The Fed mortgage bond purchase program will continue through March 31. This is the most important factor in keeping mortgage rates low because buying drives bond prices up and yields (or rates) down. For the latest on this mortgage bond buying program and what it’s doing for rates now and during early-2010, click here. And the Fed’s full statement is below. more…

The big news from today’s Fed meeting isn’t that they’re keeping overnight Fed Funds Rate the same at 0-.25% but that the mortgage bond purchase program is being extended through the first quarter of 2010. Same $1.25t target amount of purchases, but the extension gives markets more time to get used to less Fed help so mortgage rates don’t shoot up too radically as we approach the end of the year. This means two things: first, the weekly purchases by the Fed will likely decrease since the budget is the same and the timing is longer.

Second, we now have to carefully watch selling pressure in mortgage bonds as big money managers may look to trim their mortgage bond positions before the end of the Fed’s buying program—PIMCO chief Bill Gross told CNBC as much today, reiterating a stance he’s held all year. Full Fed statement below, and click the Mortgage Bonds topic link below for full weekly coverage of the Fed’s MBS purchase program: more…

My father used to say, “It’s OK to kiss a nun, but don’t get into the habit.” Speaking of habits, the bond market has become accustomed to the Fed buying mortgages. What if they stopped? Federal Reserve President Lacker suggested the Fed may not need to spend the full amount it pledged ($1.25 trillion, for folks keeping score at home) to buy mortgages. So when someone like that suggests ceasing the program, it probably means a) the economy is seeing enough of a rebound that rates may move higher, or b) the demand for mortgages (artificial, yes, but demand nonetheless) will be lower, pushing prices lower and rates higher. So prices indeed did move down after his comments.

Interestingly, it was reported that net purchases by the Fed totaled over $25 billion in the week compared to the 2009 weekly average of $23.3
billion. For the six weeks prior to this, the Fed’s weekly totals were below $23 billion. Once again, where would mortgage rates be without the Fed
having stepped in and been buying production? Would other entities have picked up production of roughly $4 billion a day? more…

Today’s FOMC announcement is below. The highlights are that they reiterated they’ll stop Treasury buying in the Fall to wean markets off this support but continue mortgage bond buying until they hit their budget of $1.25t by end of year–we cover this topic weekly, see ‘Fed Mortgage Bond Program’ articles.

FULL FED FOMC ANNOUNCEMENT
Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability. more…

Below is the full text of the Fed’s FOMC decision from their two-day meeting that just ended. They kept short-term Discount and Fed Funds rates the same and said that ‘inflation will remain subdued for some time’ but this is a slight change from the April statement that said ‘sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.’

We’ve gone from a borderline deflation message to a tame inflation message. But in these uncharted economic and policy waters, markets are interpreting this change as more severe than ‘subdued’. Mortgage and Treasury bonds, which hate inflation, have sold off after the announcement, pushing rates higher. The only thing that will help rates at this point is the FOMC’s reiteration of their continued mortgage and Treasury bond buying. In recent weeks since May 21 when inflation and bond supply problems started pushing bond prices lower (and rates higher), the Fed has not increased their mortgage bond buying, and in fact, they bought less last week than in any of the previous 2 months. So until they step up buying, rates will remain in their current range. more…

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. 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. more…

Full Fed statement below following today’s FOMC meeting. They’ve more than doubled their mortgage bond buying program to drive rates down. Rates trading lower on the news.

FULL FED FOMC STATEMENT: Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. 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. more…

The FOMC said that they will keep buying mortgage bonds according to their $500b by June schedule and also said they will keep going if necessary. They left rates alone. Mortgage bonds sold off heavily after the Fed meeting, ostensibly because they also said they’d buy long-term Treasuries as well, which contribute to already diluted yield levels. Full Fed statement below.

FOMC Policy Statement January 28
The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. more…