Mortgage Rates Respond To The August 2012 FOMC Statement

Mortgage rates are rising after the Federal Reserve's August 2012 FOMC meeting.

In its post-meeting press release, the Fed took a more bearish tone on the U.S. economy as compared to its post-meeting statement 6 weeks ago. And, despite an economy that has "decelerated somewhat", the Fed chose to add no new market stimulus.

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Near-Unanimous Vote : No Change In Rates

Wednesday, the Federal Reserve's Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current range of 0.000-0.250 percent.

The June vote marks the seventh consecutive FOMC meeting after which adjourn with a near-unanimous vote. The Fed Funds Rate has been held near 0.000% percent since December 2008.

5 years ago, the Fed Funds Rate was 4.75 percent.

In its press release, the Federal Reserve noted that the U.S. economy has been slowing. It expects growth to remain moderate between now and the end of the year, and then to "pick up very gradually". This is the same language from the June FOMC meeting.

The Fed also said that, despite further signs of improvement, the housing market remains depressed.

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Fed : No New Stimulus, No QE3 

This week's FOMC meeting was its fifth of the year. In it, the Federal Reserve sub-committee re-affirmed its plan to keep the Fed Funds Rate near 0.000% "through at least late-2014"; and said that it will maintain its Operation Twist program through the end of the year.

"Operation Twist" is a program by which the Federal Reserve sells its securities with a duration of 3 years or less, and uses the proceeds to purchase longer-term securities with durations of 6 years to 30 years.

Operation Twist allows the Fed to create demand for long-duration bonds without resorting to "printing new money". This helps to lower long-term interest rates while keeping inflationary pressures at bay.

The Fed also has a program at its disposal that does print money. It's called quantitative easing and the Fed had used it twice since 2008. With QE, the Fed literally prints new money and uses the money to buy open market securities which may include U.S. treasuries and mortgage-backed bonds. With the Fed as a buyer, bond prices rise and mortgage rates drop.

Wall Street expected the Fed to launch QE3 after today's FOMC meeting. The Fed didn't. And now mortgage rates are rising as a result. 

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Mortgage Rates Rising Post- FOMC

The end of 2014 is 29 months away. The Fed tells us to expect the Fed Funds Rate to stay low until then. However, it says nothing about mortgage rates. This is by design. The Federal Reserve does not set mortgage rates -- Wall Street does. And Wall Street doesn't like what it saw today.

Mortgage rates are rising this afternoon.

Click here to see today's mortgage rates.