Rates remain unchanged as FOMC seeks to reassure the markets
December 16, 2009 by admin
The announcement of Ben Bernanke receiving the Time person of the year had little impact on the FOMC’s decision to leave interest rates unchanged. The Fed is not likely to raise interest rates in the near term, and almost all economist predicted there would be no change with monetary policy this week. The news out of the FOMC today was in like with most experts predictions, the real news story is the verbiage of the policy statement and not the rate decisions. It appears from today’s policy statement that the FOMC is content that inflation remains very much in check and they don’t see much inflationary pressure in the markets, despite a surprising PPI report earlier in the week. The dramatic meltdown the economy experienced over the past 18 months has brought most commodity prices down, eliminating a large portion of the inflationary pressure in the markets. The near term inflation pressure could arise from energy, although it is hard to imagine oil prices climbing sharply prior to next summer.
The policy statement today also reflected the significant improvement within the non farm payroll report for the month of November. The slight drop to unemployment has fueled a broad based equity market rally and provided the Fed with some assurance that the economy is headed in the right direction. Critics are quick to argue that the true level of unemployment U-6 remains extremely high and the slight improvement with the recent figures could reflect an improvement from the retail industry and may not be self sustaining. The Fed appears content with the recent improvements and will have the benefit of reviewing and additional two employment reports prior to their next policy meeting. The long term outlook for interest rates is going to become clearer as we head into 2010, but there remains little doubt that interest rates are going to be moving up sooner rather than later. The news out of the FOMC was well received in the finance sector, where banks will continue to have the luxury of borrowing money at a zero percent rate and lending with a hefty margin. Lending profit margins are at their highest levels in years and could help bring back some profitability to struggling banks as early as next year. The overall equity markets did not enthusiastically greet today’s policy news as the Dow dropped in late trading. Long term interest rates remained relatively unchanged as the ten year moved down slightly from 3.59% to 3.57% today. Mortgage rates remain above their thirty day moving average with little reason to expect a retreat in the future. The FOMC is going to play a pivotal role in the housing and mortgage markets over the next six to twelve months as they reduce their key supporting role of the MBS markets. This transition is likely to raise long term rates and will be heavily monitored by investors and consumers. The time to buy real estate is very much over the next four months as the governments tax credit extension will also be ending in April of 2010.