For the past few years since the recession ended and the stimulus plans were put in place, every meeting of the Federal Reserve Board has meant very little to the financial markets. The Fed had basically shot every bullet in their gun by forcing interest rates down to unheard of levels. Typically the Fed focused upon only short-term interest rates by lowering discount and federal funds rates. But the severity of the recession and tenuous recovery called for unprecedented medicine in the form of purchases of hundreds of billions of dollars of Treasuries and Mortgage-Backed Securities. These purchases were designed to not only keep long-term rates low but also help shore up a residential finance market.Every meeting of the Fed since that time has created no suspense whatsoever. Running out of things to say, the Fed reached into their bag of rhetoric and made statements such as -- we will keep rates low at least until 2014, which was quite a statement back in 2012. This week's meeting of the Federal Reserve Board tells us that recently the ho-hum part of Fed watching is over. Long-term interest rates have risen significantly this year, mostly on speculation that the Fed will taper off purchases of long-term interest rate securities in the face of a recovering economy. However, while the economic numbers have been better this year, employment growth is still not strong enough to keep pace with population growth and the over-all expansion of the economy is still tepid at best. So what is the Fed to do with the economy still not strong but the markets feeling like the time is right for rates to get back near "normal"? That is where the suspense comes in. Only a strong statement from the Fed can influence the markets in this environment.
Mike Ervin
Mortgage Banker
NMLS # 282715
(650) 766-8500
mike@mikeervin.com
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