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The Federal Open Market Committee starts a 2-day meeting today, one of 8 scheduled meetings this year.

The FOMC is the policy-making arm of the Federal Reserve.  It's  most commonly known for its role in setting the Fed Funds Rate.  When the economy needs a jump-start, the FOMC often lowers the Fed Funds Rate to make borrowing less expensive for both businesses and consumers.

Conversely, when the economy is going gang-busters, the FOMC tends to raise the Fed Funds Rate to slow things down.

Currently, the Fed Funds Rate is in a "target range" of 0.000-0.250 percent -- the lowest it's been history.  It's a stimulative position for the economy and markets don't expect the rate to change. Based on trading in Fed Funds Futures, Wall Street predicts with 100% certainty that the Federal Open Market Committee will vote to leave the Fed Funds Rate unchanged.

However, just because the Fed Funds Rate will be staying as-is doesn't mean that mortgage rates will, too.

Mortgage rates are not controlled by the Federal Reserve.  They are "made" in the mortgage-backed securities market and MBS is highly responsive to changes in the U.S. economic outlook.

It's in this fashion that the Federal Reserve can influence mortgage rates.

The FOMC's post-meeting press releases address the economy, its strengths and its weaknesses.  It's also not uncommon for the Fed to offer a brief outlook for the next few quarters.  As home buyers and would-be rate shoppers, you can't underestimate the power of these worms words.

The Fed's press release will likely address the recent relative strength of housing, employment, and sales data.  If the Fed concludes that recent data foreshadows the end of a recession, look for stock markets to take off and bond markets to sink.  Furthermore, expect a return of the inflationary talk that tends to kick mortgage rates in the gut.

Inflation is the enemy of mortgage rates.

On the other hand, if the Fed's press release says that economy should remain weak through 2009 and into the start of 2010, well, that's kind of what Wall Street is expecting.  Mortgage rates would likely dip some, in this instance, but not by much.

In other words, mortgage rates may fall when the Federal Open Market Committee adjourns tomorrow, but the amount by which they could fall is much less than the amount by which they could rise.  The safe bet, therefore, may be to lock your mortgage rate in advance of the FOMC's 2:15 PM ET adjournment.

If you're not already working with a loan officer and want to get your mortgage rate locked quickly, call or and we'll take your mortgage application for you right away.  With the good chance that rates could rise again Wednesday, you might not want to gamble on waiting for a lower rate.

The Federal Reserve starts a 2-day, policy-setting meeting today, one of 8 scheduled Fed meetings this year.

The purpose of the oct-annual meetings is to review economic conditions around the country and, when deemed necessary, create new monetary policy to stimulate or retard growth.

Now, for the last 21 months, you have to remember that the Federal Reserve has been in stimulus mode, fighting this recession blow-for-blow.  It's been a knock-down, drag-em-out fight and -- finally -- it looks like the Fed is winning the battle.

• Key housing stats are turning positive
• Layoffs and jobless claims appear to be slowing
• Inflation is still within tolerance

But beating the recession has come at a terrific price -- both figurative and literal.  Not only has the Fed dropped the Fed Funds Rate as far as it can possibly go, it's committed well over 1 trillion dollars to the effort which, as PageTutor reminds us, is a million-million.

Both of these actions are kindling in the economic fire and, when they catch, Wall Street expects the flames to burn the bright colors  of inflation.  It's why mortgage markets have been all jacked up lately.  Investors know inflation's coming -- they're just at odds about when it's coming.

So that brings us to today's Federal Open Market Committee meeting.

Looking at the chart at top, markets are 99.3% certain that the Federal Reserve won't raise the Fed Funds Rate from its current range of "near-zero".  Investors have come to this conclusion because the Fed has repeatedly said it will keep the Fed Funds Rate as low as possible for as long as possible.  There's no real reason to raise it now.

But just because the Fed Funds Rate won't be changing doesn't mean that mortgage rates won't be changing.

In the Federal Reserve's press release, it will undoubtedly talk about rising energy costs nationwide, the nascent economic recovery, and the country's prospects for the next few quarters.  Furthermore, Chairman Bernanke & Co. will likely acknowledge how rising mortgage rates could hamper recent housing strength.

Any or all of these points will shake the mortgage markets at their core, causing rates to rise or fall.  The problem here is that we don't know what the Fed will say and how it going to impact mortgage rates.

Therefore, if you need to lock your mortgage rate in the next week or so and you lose sleep over the thought of mortgage rates going up, do yourself a favor and just lock it up now.  Mortgage rates may end up falling post-FOMC tomorrow, but then again, they may not.  I wouldn't want to be on the wrong side of that bet. #justsayin

However, if your rate-locking timeframe is a little more elastic, consider waiting this one out.  Mortgage rates may rise post-FOMC Wednesday afternoon, but the higher that rates get, the more likely the Fed will intervene to bring them back down.

Remember, the government has said repeatedly strong housing markets are essential for a full economic recovery and there's lot of high-paid lobbyists telling Congress that high mortgage rates are a threat to housing.  Furthermore, the Federal Reserve has anted up twice in the mortgage-backed bond market to help keep rates down.

There's history here, folks, and mortgage rates should take one more run through 5 percent.  It may not happen after the FOMC adjourns tomorrow, but it will happen sometime soon.  When it does, make sure you're ready. Low rates rarely last long.

The Federal Reserve meets next week for a policy-setting meeting. 

It’s one of 8 scheduled Fed meetings this year in which the Federal Open Market Committee votes on whether to raise, lower, or leave unchanged the Fed Funds Rate. The Fed Funds Rate is the rate at which banks lend money to each other overnight, often to be repaid the following morning.

If the idea of banks borrowing money just for an overnight period sounds like jive to you, you're not alone. Banks have do it, though, because banking regulators make lenders keep a certain percentage of "cash reserves" on hand at all times. When bank cash levels fall, they borrow the funds from another Federal Reserve member bank in the interim.

Banks can also borrow from the Federal Reserve directly, often at a slightly higher rate.

So, because the Fed Funds Rate is directly tied to bank interest payments, it exerts a palpable influence on the economy.  By changing the borrowing costs for banks, borrowing costs change for businesses and consumers, too.  Prime Rate, for example, is the basis of most business and consumer loans and is expressed as:

When the Fed Funds Rate is lowered, therefore, “cheap money” propels the economy forward.  When the Fed Funds Rate is raised, by contrast, more costly borrowing often slows the economy down.

Changes to the Fed Funds Rate do not directly correlate to changes in mortgage rates, though.  One way to understand this is to look at the Fed Funds Rate as an "overnight rate" where mortgage money is often a 30 year rate. 

30 years is 10,957 overnight rates strung together -- a completely different risk class.

The Fed Funds Rate's macroeconomic implications, in part, led to the creation of the Fed Funds Futures market.  Traded on the Chicago Board of Trade, Fed Funds Futures options contracts lets investors "bet" on what the Federal Reserve will do to the Fed Funds Rate at the next Fed meeting.

Based on data compiled by the Federal Reserve Bank of Cleveland, here's the market's expectation for the April 28-29, 2009 meeting:

• 97 percent expectation that the Fed Funds Rate will hold at 0.000 to 0.250%
• 3 percent expectationthat the Fed Funds Rate will raise to 0.750%.

There is zero expectation for a 0.500% Fed Funds Rate.

Because Wall Street is nearly unanimous in its Fed Funds Rate prediction, expect the market’s FOMC focus to be on what the Fed says next week rather than what it does. 

If Bernanke & Co. express concerns about long-term inflation and the need to contain growth, mortgage rates should rise.  On the other hand, if the Fed expects growth to be within a tolerable range, mortgage rates should idle. 

In other words, if you're shopping for mortgages right now, there’s little reason to wait for the Fed's next move before making your “Float or Lock” decision.  In a worst-case scenario, mortgage rates rise.  In a best-case scenario, they idle.

The Fed’s two-day meeting adjourns Tuesday, April 29 at 2:15 PM ET.

(Post adapted with permission from Bring the Blog)

While Wall Street sells off and Congress implements the Bailout Bill, Wall Street players are changing their expectations for the Fed Funds Rate going forward. 

Thing is, there's a complete uncertainty about what the Fed is going to do. 

In fact, there's a complete uncertainty about everything and lack of conviction on Wall Street leads to manic behavior.  It's why stock markets sell-off huge one day and rally the next.  It's also why mortgage rates are as volatile as they've ever been.

Using the chart, we can actually look back over the last 60 days and visually track how markets sentiment has changed.  2 months ago, we worried about inflation.  Today, we worry about recession.

The green line indicates a "no change" in the Fed Funds Rate from its current 2.000 percent level.  As the green line moves towards the top, it indicates the market's changing belief that the Federal Reserve will leave the Fed Funds Rate as-is. 

30 days ago, that expectation was 83 percent.  Today, it's 18 percent. 

Also worth noting is that 0.750 percent is now in-play.  Markets put a 21 percent chance of that happening.  This would be the lower than the 1 percent Fed Funds Rate level that supposedly sparked the 2005 bubble.

Irrespective of what actually happens after the Fed's next meeting, the chart does give us a good glimpse into the Wall Street Psyche.  If nothing else, we see that markets are unsure of what's coming ahead, and that's causing record volatility.

If you're thinking of floating or locking a rate right now, the chart's randomness may be reason enough to consider locking in.  Floating a mortgage rate carries a lot of risk in a market climate like this one.

(Image courtesy: Federal Reserve Bank of Cleveland)

Never doubt the power of worms words.

Mortgage rates had trended higher throughout May, but when Ben Bernanke used the word "inflation" 55 times in a speech June 4, that trend turned into a spike.  Rates are much higher now and home buyers are feeling the pain.

The chart above is for illustration purposes; it doesn't relate to mortgage rates directly.  But, it does give some insight into market mentality because it's tracking something called Fed Funds Futures.   

Read the rest of this entry »

This graphic charts how think the Federal Open Market Committee will change the Fed Funds Rate at its two-day meeting starting April 29.

Here's how to follow along:

Read the rest of this entry »

This Fed Funds Rate futures chart is pretty astounding and illustrates just how powerful the Fed's words can be.

To help you read the chart, follow these simple guidelines:

• The farther you go to the right, the closer you get to "today"
• The farther you go to the top, the higher the probability of the result
• The blue line represents "5.250% Fed Funds Rate"
• The green line represents "5.500% Fed Funds Rate"
• The purple line represent "5.000% Fed Funds Rate"
• Vertical lines represent milestone events (i.e. FOMC statement)

The chart shows us that markets believe that -- in January 2007 -- there is a 75% chance that the FFR will still be 5.250%.  Last week, that chance was 66%.

Mortgage rates have pulled back in the wake of the Fed's announcement and the chart can also help us understand why.

Look at the green line representing 5.550%.  It actually represents the market's feeling about inflation.  If markets believe that inflation is running too high, then the green line becomes reality. 

Currently, the chance of that happening is just 12% and mortgage rates are lower is response to that expectation.

It shouldn't surprise you that today's mortgage rates are on level with the October 10's rates -- the most recent day that the green line probability was 12%.

What a difference the phrase "moderate growth" makes.

Source
Fed Fund Probabilities:: Current
The Federal Reserve Bank of Cleveland, October 27, 2006
http://www.clevelandfed.org/research/policy/fedfunds/Index.cfm

This chart shows the market's predictions of the Fed Funds Rate at the FOMC's December meeting.  It probably looks like gibberish to you, so let me briefly explain what we can all glean from it.

• The x-axis is dates.  This is a running timeline going back 45 days
• The y-axis is percentages.  This represents probability based upon the trading of Fed Fund Futures
• The plotted points represent the possibililties of what the Fed Funds Rate will be after the Fed's December meeting

By looking at the line graphs of 5.00% and 5.25%, we can see why mortgage rates have headed higher this past week after touching on 6-month lows.

At the date of the first yellow line -- labeled "Employment Situation" -- you can see the market's prediction of where the FFR will be in December 2006.  The markets were 85% certain of "no change" to the Fed Funds Rate.  Today, it's about 90%.

However, even as we watch long-term trends, it's the spikes in the chart that give it meaning.  Those spike correspond to "shocks" to the expectations of market players.

Witness:

• September 18, 2006
• September 27, 2006

It only takes one surprise to alter the market's expectation and, therefore, your mortgage rates. 

Source
Fed Fund Probabilities:: Current
The Federal Reserve Bank of Cleveland, October 11, 2006
http://www.clevelandfed.org/research/policy/fedfunds/Index.cfm

20 minutes prior to the release of the Fed Minutes, and markets are predicting with 80% certainty that the Federal Funds Rate will remain unchanged after the September 20 FOMC meeting.

Interpreting the chart above provided by the Federal Reserve Bank of Cleveland, we can see what markets expect:

• 2% probability that the Fed Funds Rate decreases to 5.00%
• 80% probability that the Fed Funds Rate remains unchanged at 5.25%
• 18% probability that the Fed Funds Rate increases to 5.50%
• 0% probability that the Fed Funds Rate increases to 5.75%

The statistics are the result of a formula exacted upon the Fed Futures Markets, in case you care.  If you don't care, that's fine.  It's pretty arcane, but you can read about it if you want to.

I expect the chart to shift in the days leading up to the September 20 FOMC meeting as markets leave their comfort zone about inflation and the Fed's take on it.

Just like you can buy a stock and take possession of it today, you can also make arrangements to buy a stock tomorrow at a pre-determined price. 

Contracts to buy a fixed amount of something in the future is called a "futures contract" (duh!) and it gives us a glimpse into how traders think a particular event "will go down".

Futures can be a daunting subject, so let's make it simpler by comparing futures contracts to sports gambling.

After last season in the NFL, the Philadelphia Eagles were thought to be a lock to win the 2006 Super Bowl.  Coming off a loss in the 2005 Super Bowl, the birds had managed to keep most of their players and were gelling as a unit.

Shortly after the 2005 Super Bowl loss, Las Vegas oddsmakers put 7-2 odds on the Eagles to win the next year' Super Bowl.  7-2 odds is a 28% likelihood.

And then things went horribly wrong.

First, Terrell Owens lashed out at Donovan McTurtle.  Then, Andy Reid lashed out at T.O.  And once the team reported to training camp, the injury bug hit. 

First Donovan.  Then Owens.  Then Brian Westbrook.  And the losses mounted.

As the Eagles' future grew more bleak with each passing week, the oddmakers actively changed their expectations for the Eagles to win the Super Bowl. 

Last week, the likelihood of the Eagles winning the 2006 Super Bowl had dropped to 3.33%, or 30-1.

Today, there are no odds. 

The Eagles are now mathematically eliminated from the playoffs and so the probability of the Eagles winning the Super Bowl is 0.00%.  The oddsmakers have taken the Eagles off the board for betting.

And in this way, we can better understand Fed Funds Rate Futures. 

Just like betting on the Eagles outcome at the Super Bowl, traders can bet on what the Fed Funds Rate will be after a Federal Open Market Committee meeting.

For today's FOMC meeting, the oddsmakers (i.e. traders) have set the odds of 0.25% Fed Funds Rate hike at 100%.  They've also set a 100% certainty for the January 2006 meeting.

Because of these expectations about the future, the same traders have made other bets, too.  If the playing field changes at all -- like it did for the Eagles -- those bets will change, too.

According to the Fed Funds Rate futures market, there's a 38% probability that the Fed will raise by another 0.250% in March 2006.