Federal Reserve - Quicken Loans Zing Blog

Bob Walters is chief economist and vice president of the Capital Markets Group at Quicken Loans. 

The Federal Open Market Committee met yesterday, and things are looking pretty good in the U.S.A. The second quarter was one of job improvement and growth, which is good. The Fed did mention that there are still a lot of people out of work, which is a bad thing. So lots of room to improve, though we (as a country) are improving. Inflation isn’t much of an issue, which is no big surprise to anyone. However, with the Fed focusing on getting people back to work, we might see prices and interest rates (such as mortgage rates) start to rise. And finally, the Fed continues to cut back on their monthly purchases of mortgage-backed securities each month by $5 billion. That will means mortgage rates will likely rise.

Here is the latest Fed Release in plain English. My comments are in bold. As always, let me know if you have any questions.

Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has moved somewhat closer to the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.

Yay! The Fed is singing a happier tune these days. In this paragraph, the Fed says things got better in the second quarter (April – June). They say more jobs were created and less people are out of work. But they do point out that “labor resources are significantly underutilized.” In normal-person speak, that means there are still lots of people who want jobs who don’t have them. They point out that the housing market is slower than they’d like to see, and they also say that inflation (prices of stuff) is rising a little, but isn’t anything to worry about. All in all, I’d say the Fed gave the economy a solid B+ and added two gold stars and a smiley face.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.

As you’ll recall, the Fed has two jobs: 1) Keep the economy humming so people are working and 2) Make sure the economy doesn’t hum too fast, which might cause prices to rise too much. The Fed spends its life trying to keep these two things in balance. In the past few years, the Fed has said it was more worried about getting more people working and less about prices. Now, it’s saying that it worries equally about both. That is good news for the economy because it means the Fed thinks things are getting better. However, the Fed is telling us that it sees the economy getting its act back together and it’s starting to think more about inflation (prices). What does the Fed do when it starts to feel that way? It raises rates … just sayin’.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

If you’re a Wall Street trader, this was the paragraph you fast-forwarded to. Not surprisingly, the Fed says here that its buying of mortgage bonds and Treasury bonds will continue to slow. They will be buying $5 billion less each month of each. Why do we care? When the Fed buys mortgage bonds, the price of those bonds goes up, and when the price of mortgage bonds goes up, mortgage interest rates go down. The less bonds the Fed buys, the less likely we are to see mortgage rates stay low. The good news? They still are low today. If you read carefully, you’re seeing that people might be running out of time to take advantage of the fact that mortgage rates are still close to 100-year lows.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

This is the, “We’re going to do our job” paragraph. Thanks, Fed!

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

Here, the Fed says they will keep short-term rates at near 0% (like they have been since 2009). It’s unusual that that rate has been 0% for as long as it has been. Heck – back in 1985 when Dan Gilbert founded Quicken Loans, the Fed Funds rate was almost 20%!

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

This is the paragraph where the Fed says they won’t do anything crazy. Thanks, Fed!

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo. Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.

Oh no! All the Fed did NOT agree! Charles Plosser disagreed with the way the Fed is stating that it will keep rates for a “considerable time.” He wants to be able to pull the trigger on moving rates up if necessary. 

What do you think? Let us know in the comments below!

 

 

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This Post Has 2 Comments

  1. I currently have a mortgage loan with Quicken Loans with a bal. a little over 43K.
    in Austin, TX where home prices are soaring. 1. I’d like to sell this property at about $295K (one house on my street just sold for near $300K) in April of 2015 and move back to Northern Calif. I’m in a great area near shops, a middle school and public transportatiion leading to nearby I35. The home has been totally redone: with new roof, two-room extension with 1/2 bath, wood and tile flooring; NEW
    A/C, furnace, water heater, NEW cabinets and granite counters, ceiling trim & paint
    inside and out, improved landscaping to include 5 nut & fruit trees and two others, many roses bushes, shrubry surround, elec.yard lantern, security lighting and camera, cemented walk/side, covered patio, paving stoned patio across full length of the back yard, brick trim around the yd. & front walkway, front and side metal
    fencing and a brick mailbox with ornament. Garage has been air conditioned, re-
    plastered and painted with wall paneling & carpet added in 1/2 room area.
    Equity in the home is secure and promising, so what amount of loan will you give
    me (with a credit rating of 7.83 and pay off of 6K credit cards should I ch0ose to buy now in Northern Calif. (before interest rate go up) and sell in March when rental agreements with my room mates expire. I can show proof of rental rental income and reports of rental income in Fed. tax returns over the last two years
    (3 room mates = $1490 mo./currently, plus my SS and Retirement benefits).

    2. Should I choose not to sell in April of next year, 3-4 bedroom homes such as
    mine in this area rent for $1,200 to $1500/mine because there is a joined but
    separate rental unit on back with private 1/2 bath and entry (home exension
    in the rear was under permit and building inspection by the City of Austin.

    Given the two scenarios above, I’d like at least a 4% loan of about $300K with
    $20 down and pay off of my credit cards now. I’ve had an offer of a 5% loan
    with actual proof of income, but I’m yur Quicken Loans customer and expect less
    interest. I’m vibrant and healthy and plan to live in the next home purchased
    with a paying room nate. I have ample life insurance and of course over $200K
    equity in my current home financed by you. A Goid Faith estimate for a home
    loan of about $300K would be appreciated.

    1. Very good questions, Juanita!

      I’ve forwarded your questions to our experts who should be reaching out to you soon.

      Have a good day!

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