Investments

FOMC keeps buying mortgage bonds, but hawkish sentiment shines through

Fed could taper before reaching its stated goals

The latest minutes from the Federal Reserve's Federal Open Market Committee show the central bank staying the course on mortgage-backed securities and Treasury purchases.

Notes from the meeting indicate the Fed is remaining on the sidelines until the economy can sustain further growth. Still, the markets latched onto one portion of the report in which the Fed suggested it could carve back on stimulus before reaching its stated economic goals under certain undefined scenarios.

Lindsey Piegza, managing director and chief economist with Sterne Agee, pointed out that "Federal Reserve officials said they might reduce their monthly bond buying program from $85 billion 'in coming months' as the economy continues to improve."

Despite the industry witnessing a better-than-expected third-quarter GDP report and October non-farm payroll, Piegza saw signs of economic pessimism when Fed Chairman Ben Bernanke spoke earlier this week. She explained that Fed Chairman Ben Bernanke viewed the latest slew of economic data as 'somewhat disappointing.'

Minutes from the Oct. 29-30 meeting reveal an economy that is recovering at a moderate pace but that still has room for further improvement. 

"Information received since the FOMC met in September generally suggest that economic activity has continued to expand at a moderate pace. Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated," the FOMC minutes stated.

"Available data suggests that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth," the minutes explained.

Due to only slight moderate growth in the housing market, the committee decided to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of $40 billion.

Additionally, the committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent.

The committee remained cautious in light of future risks stemming from uncertain fiscal policies and the potential impact rising rates could have on housing construction and other parts of the real estate market.

“By the end of 2014, rates will probably approach and perhaps touch 5%. A reason we see the uptick in rates is that I do think some point the Federal Reserve will start to taper and scale back its very active purchase on long-term Treasuries and mortgage-backed security,” Frank Nothaft, chief economist with Freddie Mac, said in an exclusive HousingWire webinar on Tuesday.

“I do think that by the time we get to the spring, we will get a statement from the Fed that indicates what they are thinking in terms of scaling back the purchase program and that will start to apply gradual upward pressure on mortgage rates.”

While most participants said their opinions had not changed since the September meeting, the minutes show some concerns over second-half economic data, with FOMC members fearing weaker growth than expected.

Once again, Esther George was the only dissenting vote. George does not view the aggressive easing of monetary policy as warranted in the face of both actual and forecasted improvement. 

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