Where are Interest Rates Going and Why?

What the Fed Said Last Time

What the Fed Said This Time

What Difference does it make…..

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.

Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing.

Deterioration is abating vs. stabilizing - a modest improvement but if that’s all the improvement we’re going to get in 6 weeks time, it’s going to be a long way back.

Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit

Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

What’s the difference between weak labor market and “high unemployment? I’m thinking that it’s not an improvement, but I’m not sure.

Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls

Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.

Two important changes on this part - one good and one not so good. They went from saying business spending appears to be picking up to “rises signifcantly.” That’s a good thing. However when talking about buildings (both residential and non), the terminology got significantly worse since January.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Two important things in this section: 1) The Fed has reaffirmed that they will be done purchasing mortgage backed securities in 15 days. I’ve read a number of analysts who have said that the mortgage rate market is acting like nothing is going to happen. That makes for a rude surprise coming. 2) In January, the FOMC “hinted” at buying additional securities if needed. That’s now toned down significantly.