Fed to Pare Assets
The Federal Reserve Board meets this week to decide what to do with short-term interest rates. With Chairperson Yellen having testified before Congress recently, the tone of her remarks has led the markets to believe that there is little chance of a rate hike this time around. However, analysts will be watching for any wording in the announcement regarding the Fed starting to sell off their bond and mortgage assets later this year. As usual, the Fed is trying to maneuver through a delicate balancing act.
Recent moves to raise short-term rates demonstrate that the Fed is comfortable with the current state of the economy. However, if the Fed floods the market with their assets, this could cause a rise in long-term rates, which might in turn slow down the economy. Thus, the Fed will need to carefully divest itself of these assets taken on during the recession and long recovery. Just as Yellen has indicated that the Fed is looking to raise rates gradually, the selling of these assets will need to follow the same course.
The good news is that recent economic reports have shown inflation to be under control. Absent the threat of increased inflation, the Fed can be more deliberate when implementing these actions. At this point, there seems to be no sign that the economy is quickly gaining steam. Of course, with the first reading on the second quarter economic growth and the August employment report coming out shortly, the balance we currently are seeing could change very quickly.
The Weekly Market Update
Rates moved back down last week after rising the previous two weeks. For the week ending July 20, Freddie Mac announced that 30-year fixed rates fell to 3.96% from 4.03% the week before. The average for 15-year loans decreased to 3.23%, and the average for five-year adjustables moved down to 3.21%. A year ago, 30-year fixed rates averaged 3.45%. Attributed to Sean Becketti, chief economist, Freddie Mac — “Continued economic uncertainty and weak inflation data pushed rates lower this week. The 10-year Treasury yield fell 5 basis points this week. The rate on 30-year fixed loans moved with Treasury yields, dropping 7 basis points to 3.96%.”
Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.