The Fed – Translated….

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.

 

So what does it all mean for the mortgage world?  A couple of thoughts:

• The largest buyer of mortgage backed securities is leaving the market in 15 days.   (And they really really mean it this time!)  That’s not going to be without an impact on the mortgage rate markets.    According to the analysts that I’ve read and heard, the predictions range from .25% in the first 30 days to a gradual increase of 1% or more over the next 18 to 24 months.
• It shows an analysis of the economy that is mixed.   There are parts that have improved since January but parts that haven’t.

We aren’t out of the woods yet…….

The Fed Translated…..

In keeping with my practice of translating the Fed’s statements, here goes this one:

“Move along, keep moving, nothing to see here folks!   Business as usual!”

They didn’t do a thing to address the bond market concerns or to allow that things are changing at all.   Expect mortgage rates to drift up a small amount on the lack of news…..

Tom Vanderwell

The Fed Translated

The Fed Translated….

Yep, it’s that time again.    The Fed met yesterday and today and came out with their announcement this afternoon at 2:15 pm.   I promise that this one won’t be as long as the last Fed Translated was.

As usual, my comments are in bold and italics…..

April 29, 2009

For Immediate Release:

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.  The downhill slope is less steep than it was.  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.  We aren’t going to see a substantial turn around in the economy soon.  A weak, ambivalent turn around, probably, but not a strong return to growth.  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. What else could they say but to say that they anticipate that what they are doing will eventually work?   Would the markets be happy if they said, “We don’t have a clue whether what we’re doing is going to work?”   Nope.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. They don’t say for how long, but I’m going to say that I think we’ve got 12 to 18 months until we start seeing a rapid spike in inflation and a rapid jump in interest rates.  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.  Let’s look at that for a minute.   They think that inflation would be lower than is healthy for a while and so…. So they are going to do what they can to spur things on and encourage inflation – which brings up the possibility that they’ll stir up inflation that they can’t “control.”   Kind of scary…..

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.  They are going to continue to do what they’ve been doing because: 1) They don’t want to take the step that they are trying to avoid which is to overhaul the banking system and 2) If they aren’t willing to take the big steps with Bank of America, Citibank and others, they have nothing else they can do.

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; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Tom here….. So what do I expect the Fed’s statement will do to the markets?   Actually, probably very little.   We might see a little more volatility in the next few days but I expect that we’ll see more volatility and turmoil out of the results of the banking stress test than we will out of this statement.

The Fed Translated

The Fed Translated…..

Well, it’s time to do a little Fed translating again.   This one was a big one, so settle in and let’s translate it.    As usual, my comments are in bold and italics.

Release Date: March 18, 2009

For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  The economy continues to contract – no surprise there.  But ask yourself, if the economy continues to contract, then why is the stock market rallying?

Job losses, 651,000 jobs lost in February,  declining equity and housing wealth over 20% of the homeowners with mortgages are underwater, and tight credit conditions not only in mortgages, but home equity loans, credit cards, car loans etc., have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit businesses are having a harder time getting credit too. 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. This isn’t just a US recession, it’s pretty much all across the country.  Although the near-term economic outlook is weak gee, that’s an optimistic outlook of things, don’t you think?, the Committee anticipates anticipates?  Is that sort of like I anticipate that I’ll become a millionaire by the time I’m 45? that policy actions to stabilize financial markets and institutions translated – more bailouts, together with fiscal and monetary stimulus translated – the Fed’s printing press will be working overtime!, will contribute to a gradual resumption meaning we really don’t know when things are going to turn around of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued but they don’t say for how long inflation will stay subdued.  My estimate is that we’re looking at 12 to 18 months before the economy recovers enough for inflation to become an issue.   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 best foster growth and price stability?   Why don’t they just say that they are concerned about deflation?   Frankly, because it would scare the crap out of already spooked markets.

In these circumstances, desperate times call for desperate measures, the Federal Reserve will employ all available tools We’re not holding anything back folks.   All artillery is aimed at the problem and we’re going to keep shooting and shooting and shooting.  We don’t care if it’s the wrong type of gun, well maybe we do care but we can’t do anything about it, but we’re going to keep using all of the guns we have! to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent no surprise there – it’s not like they could drop it any further…… and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. extended period of time – if rates are going to stay low for an extended period of time, that means that we shouldn’t expect the economy to recover any time soon.   To provide greater support to mortgage lending and housing markets, support to mortgage lending and the housing market?  How?  By providing more of the “crack” that got us in this mess in the first place?   Or by making sure that Fannie, Freddie and FHA survive and stay open?  I’m hoping that it’s keeping Fannie and Freddie and FHA open with reasonable, responsible lending.   the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion - in case you are keeping track, that’s a paltry $50 Billion more than what was originally spent on TARP 1 and it was spent without any debate – of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.  In case you haven’t calculated it, I did.  What the Fed announced today works out to $119,863,013.69 per hour over the course of the next 12 months.  The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. We’re going to start buying loan packages (securities) secured by all sorts of loans because we desperately need the consumer and the small business to start getting further and further in debt.

The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.  Hopefully this means that they are scared out of their minds by how much money they are borrowing!

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; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen. 

Tom here – a couple of additional thoughts about what happened today:

• What I’m calling the “Big Gun” theory – Many people, present company included, are surprised that the Fed came out with this big of a move this month.    They had been anticipated to leave some of that “in the bag” for future use.   However, they didn’t.   They pretty much shot their entire arsenal full of ammo right now.    Is that dangerous?    Well, if you are being attached by an angry rhino, you need to use all of your ammo and hope that you kill it.   If you miss, then you’re in trouble.
• We saw a very nice .25% drop in rates immediately after the Fed’s announcement.   That puts us at 5.0% on a 30 year refi with 0 pts and 4.75% on a 30 year purchase.  Both are with 0 pts, a 720 credit score and an automatic debit from a Fifth Third account for the first 12 months.
• The amount of money the government is throwing at the economic mess is truly astounding.  Eventually this is going to come back and “bite” us.  How is it going to bite us?  A couple of things:  Higher interest rates due to the increased perception of risk in the government’s ability to eventually pay off these debts.   Higher inflation due to the government’s overuse of their printing press, and higher tax liabilities as the government attempts to pay the bills.

So what’s my thoughts and recommendations from here?  A couple of thoughts:

• Past efforts by the Fed to buy mortgage backed securities have not had the stimulative effect that they had hoped.   Remember the talk about buying rates down to 4.5%?  We’ve never been closer to that than we are right now.
• The law of supply and demand is working against the Fed.  How so?  By borrowing as much money as they are, they are flooding the market with short term Treasuries.   Do you think the Fed is sitting on $1 Trillion in cash they can use?  Nope, they need to borrow it.   The supply outpaces the demand and rates go up.

I’m going to go on record and say that the efforts that the Fed announced today will do a couple of things:

• Keep Fannie, Freddie and FHA open and operating.   This is a very good thing for the housing market.
• Give us a nice, but relatively short term drop in mortgage rates.   How short?  I’m thinking that within 1 to 2 weeks, we’ll see rates inch back up to around where they are now.

I was “chatting” with David Gibbons from Zillow tonight and he very nicely brought up the “glass half full/glass half empty” analogy.   His point was that he felt I’m taking too much of a negative viewpoint.   Here’s my take on why I write and what I say on these type of topics:

• This is a very confusing time and like I told a client this afternoon, it’s a time that will be studied in history classes for years.
• While I don’t have all of the answers (not even close), there are many people who have a lot less of an understanding of what’s happening than I do.  If I can help others understand it better and prepare and act on things better, it’s a win win situation.
• Now is probably the most important time in the last 20 years for clients, referral sources and potential clients to have the type of advice and understanding that it takes to make sure they handle their real estate and mortgage needs correctly.  That’s why my mortgage blog is called Straight Talk About Mortgages and Real Estate.
  

My recommendation would be to lock all loans because no one knows how long we’ll see the advantages of this dip, so grab it while you can.

Tom Vanderwell

The Fed Translated

Wow, a lot to talk about…..

I’m working on “The Fed Translated”

Stay tuned……

The Fed Translated