Today, the Federal Open Market Committee voted 10-to-0 to leave the Fed Funds Rate unchanged within its target range of 0.000-0.250 percent.

In its press release, the FOMC noted that since December’s meeting, economic growth is ongoing, but at a pace deemed “insufficient” to make a material impact on the jobs market. In addition, the Fed said household spending “picked up” late last year, although it continues to be held back by joblessness, tight credit and lower housing wealth.

This is similar to the language used in the FOMC’s November and December 2010 statements.

Also like its last two statements, the Fed used this month’s press release to re-affirm its plan to keep the Fed Funds Rate near zero percent “for an extended period”, and to keep its $600 billion bond market support package in place.

And finally, of particular interest to Bucktown home buyers and mortgage rate shoppers, for the second straight month, the Federal Open Market Committee’s statement contained an entire paragraph detailing the Federal Reserve’s dual mandate of managing inflation levels, while fostering maximum employment.

The Fed acknowledges progress toward this goal, but calls that progress “disappointingly slow”. Inflation is too low right now, and joblessness too high.

Over time, the Fed expects both measurements to improve.

Mortgage market reaction to the FOMC has been positive since the statement’s release. Mortgage rates in Chicago are unchanged, but poised to improve.

The FOMC’s next scheduled meeting is a 1-day event, March 15, 2011.

Last week’s major headlines included that existing home supplies plunged to a 2-year low in December, and unemployment claims dropped more than expected, giving hope for the U.S. economy in 2011.

We have another week that is loaded with economic news.

As always, if it is a Fed week, it is the big news story.  Scheduled for Tuesday and Wednesday, we’ll get the first press release of the year after the meeting on Wednesday.  It’s a virtual lock that the Fed Funds Rate will remain unchanged.  The big question, as always, is what the Fed will say.  If it is bullish on the economy, mortgage rates will go higher.

We also will see more housing data.  There are four reports scheduled:

1. Case-Shiller Index (Tuesday)
2. Home Price Index (Tuesday)
3. New Home Sales (Wednesday)
4. Pending Home Sales (Thursday)

Strong results for housing will push mortgage rates higher.  Since November 3rd, mortgage rates have moved higher.  In the past few weeks, they’ve been trading in a narrow range.  Like stocks, bonds tend to make a move after moving sideways for this long.  With a loaded economic calendar, a Fed week, and the State of the Union, there’s enough data for mortgage rates to make a move this week.

Monday and Tuesday saw home loan rates improve while mortgage backed securities improved by 28 and 56 basis points, respectively.   A less-than-optimistic Fed comment pushed mortgage rates lower, before a late week rally ate back some of those gains.  We closed the week up 38 basis points on a week that generally pushed rates down by about 0.125% on the most common loans.

According to Freddie Mac, mortgage rates remain near their lowest levels of all time.

While interest rates remain generally low, it hasn’t made finding the best mortgage rate any easier.   Pricing has been extra volatile lately and it hasn’t been uncommon for rates to ebb and flow by as much as 0.375% during the week.

Interest Rate Predictions for This Week

Even compared to these last few weeks, expect this week to be volatile.

For each and every sign that is pointing to economic expansion, there is an equal and opposite stat pointing towards another recession.  This utter lack of conviction or direction materializes in mortgage rates daily when we see wild swings through the day.

This week is very light on data.  That typically means that the momentum of the stock market should drive rates.   Since Wall Street is lacking conviction, our “momentum” is more like the airplane “fasten seat belt” light.   We’ve moved higher and lower, violently, through some of these recent weeks and always seem to end up pretty near to where we started.

In the news:

• Tuesday:  Consumer Confidence and Case-Shiller
• Thursday:  Jobless Claims and GDP data
• Friday:  The jobs report is delayed a week from its normal first Friday release date limiting the data to consumer spending figures

We move into yet another week where interest rate predictions are driven by “not if, but when.”   Uncertainty in the market is following from uncertainty over what the government is going to do next.  There are major issues up in the air and Wall Street likes certainty as much as large bonuses.

It wouldn’t be out of the realm of possibility for rates to jump higher today or tomorrow.    However, it is setting up that the November elections could give Wall Street certainty over tax code and other changes.    If that’s the case, there could be very limited time before we reach that moment when rate fully ignite and jump higher.

That is not news.

The news from yesterday’s press release included:

• Pace of economic recovery “has slowed”
• Household spending is not recovering for the same factors we’ve discussed before, including unemployment, home values, and restrictive credit

This is the second consecutive FOMC statement that was less optimistic than the year-long series of optimistic Fed releases starting in June 2009.

There are two truths that we all need to accept so that we can move forward:

• The recession is over
• Growth has resumed, just at a snail’s pace

Why Mortgage Rates Rallied Yesterday

By all accounts, this was not a heavily pessimistic statement and it really shouldn’t have triggered a mortgage rates rally and it really shouldn’t have triggered chaos in the equity markets.  What’s happening now is the typical Wall Street game where traders infer what a particular sentence fragment means and then they make multi-billion dollar trades based on the info.

In a nutshell, that actually describes why Fed policy days are so volatile.

The concern right now was that the Fed referenced, whether as a main point or a side point, that they wouldn’t hesitate to inject further cash into the economy if the recovery can’t grow on its own.  While that’s reassuring to know that the Fed won’t stand idly by if the economy starts pulling a Titanic, it also caused half of the Western world to wonder what exactly the Fed is expecting to go wrong.

That single statement pushed gold over $1,300 an ounce.   Similarly, money poured into bonds, including mortgage-backed bonds, pushing mortgage rates lower on the day.

Where are Mortgage Rates Going?

No one knows where, but we know it will be a pretty volatile ride along the way.

Those two goofy percentages are probably going to be in a lot of posts in the near future.  Long-time readers will remember the “inflation high, mortgage rates high” and “inflation low, mortgage rates low” relationship that we regularly cover.

There is only one thing that scares central bankers more than Carter-esque inflation, it is Japan-esque deflation.    In a perfect world, the Fed would be able to manipulate inflation to a low, steady, and non-volatile constant.   The world is not perfect and inflation can be a little fussy when you try to manipulate it.

All eyes are now turning from the fluff that is the post-meeting release to the full minutes that we’ll see in a few weeks.   Right now, there are a lot of question marks.   We are all prepared for a slow, but stable recovery.  The Fed threw a curveball with the “prepared to step-in” statement….what do they know about the recovery that we don’t or was that just to reassure everyone?  If deflation is a concern, the Fed will act aggressively to encourage inflation.  If necessary, they’ll choose “too much” inflation before they’d let deflation set in.

If I was handicapping these bets right now, here’s what I see:

• Fed fails, we start to see deflation:   It  doesn’t matter what you do.  It’s the Japan-plan.  It’s a 20-30 year mess where we just talk about the woes of having an aging society.
• Fed succeeds:  Rates higher, home prices higher, rents higher.

The stakes are pretty high.

After adjourning, Fed Chair Ben Bernanke will release the formal post-meeting press release and policy statement.  The market has a 99%+ forecast that rates will remain unchanged and in their target area of 0.000-0.250%.  It’s been at that level since December of 2008.

The Fed Funds Rate is not a mortgage rate.  It’s not a consumer rate of any kind.  It is the rate that defines the cost of an overnight loan between banks.  The Fed Funds Rate has no direct consequence on mortgage rates, but it is the basis for the Prime Rate, the interest rate that drives most consumer credit cards and many business loans.

Since it is all but a guarantee that the Fed Funds Rate will not change, most consumers will wake up tomorrow with the same credit card rates as they had today.

Mortgage rates, on the other hand, will likely change today.  Perhaps dramatically.

Home mortgage rates don’t tend to vary based on what the Fed does, but rather what the Fed says.

The policy statement will be a brief release covering strengths and weaknesses in the economy and outline what threats are of the greatest concern to the Fed for the next few quarters.  Depending on how Wall Street interprets the release, interest rates will either rise or fall.

Strong economic forecast = higher rates.  Weak economic forecast = lower rates.

We’ve discussed this repeatedly in the past few weeks.  All measures of “strong” or “weak” in terms of economic forecasts are relative to expectations.  Since Wall Street expectations can only be described as dismal or worse, anything better than a “sky is falling” message could trigger rates to jump higher.

If you’re actively shopping for a mortgage, locking in your mortgage rate before the 1:15 CDT announcement may be prudent.  There remains very little to gain and quite a bit to lose.

The vote went 9-1 and left the Fed Funds Rate unchanged.   We remain in the target range of 0.000-0.250 percent.

In its press release, the FOMC said that, since June’s meeting, the pace of economic recovery “has slowed”.   They cited slower restrained consumer spending due to the job market, home values, and a still-tight credit market.

The last year’s worth of Fed statements were optimistic.  That string, dating back to June of 2009, broke yesterday.  The Fed-speak was for growth to be “more modest in the near-term.”

Lost amidst the negative headlines were the Fed’s acknowledgments of some strong sectors:

1. Growth is ongoing on a national level
2. Inflation levels remain exceedingly low
3. Business spending is rising

As expected, the Fed re-affirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period”.

The reaction yesterday was decidedly neutral with little to no change in rates after the meeting.  Today has seen the stock market take a beating and mortgage bonds have been trading better.

What is clearly shaping up is a very “normal” credit market.  Credit is supposed to be easy and favorable for people with a 720 FICO, it is supposed to be tight and expensive for people with a 620 FICO.  The current mess is the result of deviating from Credit 101.  If we’re heading into a normal market, or at minimum a market that is normalizing, Credit and its cousin, Cash, are reigning supreme.   We’re seeing it in the mortgage market, we’re seeing it in the private mortgage insurance market, and consumers everywhere are seeing it–the rules of credit for 2010 (and beyond?) are simple:  You’re in or you’re out.  There is no middle.   That’s not necessarily good or bad, that’s just normal.

On that note, if you haven’t done your annual check-up.  Do it.  Go here: https://www.annualcreditreport.com If you are being asked for a credit card number, you clicked on the wrong button.  Go back and follow the smaller button that says “free.”  (It’s free, but the site is a little sneaky)

The FOMC’s next meeting is scheduled for September 21, 2010.

FHA and conforming rates both saw lower rates causing a surge in refinancing activity.  For a brief moment on Thursday, mortgage bond prices reached their best levels of the year.  The market corrected by Friday morning and this week will be loaded with both data and rhetoric.  For interest rates, the combination of data and rhetoric can be a dangerous combo.

The biggest news of the week is the Federal Reserve’s 2-day meeting, scheduled for Tuesday and Wednesday in Washington D.C.

The Fed is expected to hold the Fed Funds Rate in its target range near 0.000-0.250 percent.  As always, what the Fed does is irrelevant.  It’s what they say that will drive this week’s mortgage rate movement.  They’re going to paint a picture of the economy moving forward, covering jobs, growth, and inflation.

If that picture is bright and sunny, rates rise.  If that picture is gloomy, rates hold.

Data will also drive mortgage rates this week.

There’s key data due for release next week, too:

• Tuesday : Existing Home Sales and Home Price Index
• Wednesday : New Home Sales
• Thursday : Continuing Jobless Claims
• Friday : GDP and Consumer Sentiment

Mortgage rates improved, but were relatively tame last week.  This week, volatility should return.

If you’re shopping for a mortgage, rates remain very low but could reverse quickly. Your biggest risk is tied to the Fed’s adjournment Wednesday afternoon.

Upon adjournment, Fed Chairman Ben Bernanke & Co. will release a formal statement to the market. In it, the Fed is expected to announce “no change” in the Fed Funds Rate.

The Fed Funds Rate is currently in a target range of 0.000-0.250 percent.

The Fed Funds Rate is an inter-bank lending rate. It’s also the basis for Prime Rate, a consumer interest rate on which credit card payments are based, among other consumer loans.  Prime Rate is equal to the Fed Funds Rate + 3 percent.  Credit card rates, therefore, will likely stay flat today, too.

Mortgage rates, however, should change.  Possibly by a lot.  The 30-year fixed mortgage does not correlate with the Fed Funds Rate (as shown in the chart at right).

The reason mortgage rates will change today is because, in its statement, the Federal Reserve will highlight vrious parts of the economy, identifying strengths, weaknesses and probable threats to growth.

These observations influence investors with a stake in bond markets and future returns and, with Wall Street on edge right now — unsure of whether recent economic growth is a longer-term trend or a short-lived blip –  mortgage rates could shoot higher or they could drop, depending on how traders interpret the Fed.

It’s a difficult time to be shopping mortgages in Illinois.

Further complicating matters is Greece’s recent debt downgrade to junk status. A small contagion fear is budding worldwide and, as a result, the flight-to-quality has picked up steam. Mortgage rates are down because of it but could reverse higher at any moment.

Therefore, if you’re actively shopping for a mortgage today, it may be prudent to lock your rate ahead of the Fed’s announcement and any major market reversal. Mortgage rates may fall today, but there’s very little room for them to fall.  This is, however, a lot of room for them to rise.

The Fed adjourns at 2:15 PM ET.  Call your loan officer to lock your rate.