With
little progress on the fiscal cliff talks and few surprises in this
week's economic data, the Fed meeting was this week's big story. Policy
changes announced in Wednesday's Fed statement raised investor concerns
about higher future inflation, and resulted in mortgage rates ending the
week a little higher.
The
Fed announcement contained two major policy changes. The first, which
was widely expected, is that the Fed will purchase $45 billion per month
of long-term Treasury securities beginning at the start of 2013 to
replace the Operation Twist program which expires at the end of this
year. This will be in addition to the $40 billion of mortgage-backed
securities (MBS) that the Fed now purchases monthly. The second change
from the Fed was not expected. For the first time, the Fed announced
that it will keep the fed funds rate at very low levels until certain
economic targets are reached. Specifically, the fed funds rate will
remain low until unemployment falls below 6.5% and inflation tops 2.5%.
Despite
four years of extraordinary levels of Fed stimulus, the economic data
released this week revealed that inflation is not a problem right now.
This week's data showed that Core CPI, the most widely followed measure
of inflation, was only 1.9%. The concern for investors after the Fed
statement is that the Fed appears to be willing to tolerate a higher
level of inflation in its efforts to boost the economy, and inflation is
negative for mortgage rates.
Source:Marshall Moody at Bluebonnet Capital Mortgage