The Home Buyer's Korner

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March 18th, 2015

Guy looking up in color

Federal Open Market Committee Meeting

Janet Yellen

The Fed moved closer to an interest rate hike for the first time since 2006 but downgraded its economic growth and inflation projections and made it clears it’s in no rush to raise short-term interest rates. For me it’s a signal from Chairperson Yellen she knows how to walk the fine line between Wall Street and Main Street and a job well done. “Just because we removed the word ‘patient’ from the statement doesn’t mean we’re going to be impatient,” Fed Chair Janet Yellen said in a press conference after Wednesday’s statement. The Fed further noted that a rate increase remained “unlikely” at its April meeting and said its change in rate guidance did not mean it has decided on the timing for a rate hike. Yellen told reporters that a June move could not be ruled out.

The U.S. central bank removed a keyword in its policy statement being “patient” on rates and opened the door for a hike in the next couple of months, while expressing caution on the health of the economic recovery. If you’ve been a regular reader of my blog you’ll know many on Wall Street have been pushing for a hike, while many report coming from the beginning of 2015 have shown we still have serious concerns about economic recovery. Those on Wall Street see the world as being in great shape while the rest of us haven’t seen any real recovery yet.

More signals that Fed Chair Yellen is hearing us on Main Street is the Fed’s statement that they have slashed their median estimate for the federal funds rate for 2015.  The key overnight lending rate is not estimated to be at 0.625 percent for the end of 2015 from the 1.125 percent estimate. Knowing

The cut to the so-called “dot plot,” together with other economic concerns cited by the Fed and what I’ve been pointing to much in our previous blog post sent a more dovish message than Wall Street was expecting and pushed market estimates that the central bank’s rate hike is more likely to be in the fall versus wishes by Wall Street for a hike in June.

Stocks on Wall Street surged and oil prices jumped as much as 5 percent after the Fed statement. The dollar tumbled against other major currencies and the U.S. 10-year Treasury yield dipped below 2 percent for the first time since March 2. Recently we’ve seen weekly hikes in mortgage rates and it will be interesting to see what direction mortgage rates go over the next few weeks. My guess is we might see another increase tomorrow in the Freddie Mac Survey, but I think we’ll see mortgage rates come down a bit over the next few days and weeks, now that the pressure from Wall Street appears to be shelved for moment.   

In its quarterly summary of economic projections, the Fed cut its inflation outlook for 2015 and reduced expected U.S. economic growth, which gives us a clear signal the Fed understands that although things are getting better on Main Street, the patient hasn’t totally recovered.  The policy statement repeated its concern that inflation measures were running below it expected 2 percent increase and weighed down in part by falling energy prices.

“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium-term,” the Fed said.  It good news to see the Fed is holding to it 2 percent inflation rate increase a measure to gage an improving economy on Main Street, those on Wall Street had been pushing them to disregard the low inflation rate. As for the labor market, many believe the slack rate isn’t improving and that’s obvious if you’re a wage earner as wages continue to remain flat.

The Fed on Wednesday downgraded its view of economic activity, saying growth has “moderated somewhat,” a departure from its view in December, when it cited economic activity expanding at a solid pace.

Yellen has kept rates at near zero since taking over as head of the central bank in February, 2014, though she has also overseen a steady whittling of loose money promises and from all signs doing a good job.  While she laying the ground for a real recovery on Main Street the Fed continues to grapple with muddy economic data. We’ve seen strong job creation, continued growth and healthy consumer demand, but a global collapse in oil prices and a rapid run-up in the dollar could mean the Fed remains far from its 2 percent inflation target.

There were no dissents on the Fed statement.

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