Thursday, July 18, 2013

Federal Reserve Update - July 2013

 The minutes from the Fed's June meeting of the Federal Open Market Committee showed that the Fed's Bond purchases will be contingent on how the U.S. economy does. Some members said further labor market improvement is needed, while several said a reduction in purchases would soon be warranted.

In terms of the labor market, regional and state unemployment rates were little changed in May. Twenty-five states had unemployment rate decreases, seventeen states had increases, and eight states and the District of Columbia had no change. And while the Jobs Report for June looked strong on the surface, when you dig into the report a lot of the jobs created were for low-paying jobs and part-time help. In addition, for the 18-29 year age group, the Unemployment Rate is a staggering 16.1 percent.

The labor markets are not out of the woods yet, and this is one of the reasons for continued stimulus from the Fed. In fact, on Wednesday Fed Chairman Bernanke tried to soothe the markets by stating that some of the easy money policies will be around for the foreseeable future due to high unemployment and inflation pressures remaining stable.

What does all of this mean for home loan rates?

Remember that the Fed's Bond purchase program has helped Bonds and home loan rates remain attractive. But the timing of tapering this program really does depend on whether the housing and labor markets continue to improve. In addition, with thousands of companies reporting their second quarter earnings over the next few weeks, the Fed will be watching closely. If numbers are reported at or below estimates for key sectors, the Fed may have to rethink the timeframe for tapering its Bond purchases.

Another key factor to monitor is inflation. Inflation at the wholesale level jumped by 0.8 percent in June, well above expectations, led by an increase in energy costs reflecting higher gasoline prices. Remember that inflation is the arch enemy of Bonds (and therefore home loan rates, which are tied to Mortgage Bonds) because inflation reduces the value of fixed investments like Bonds. Low inflation has given the Fed cover to continue its Bond purchases, but if inflation heats up, this could cause Bonds and home loan rates to worsen.

The bottom line is that home loan rates remain attractive compared to historical levels, and now remains a great time to consider a home purchase or refinance.