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Fed
Announces Policy Change
Tuesday's
highly anticipated Fed meeting resulted in a policy change which was
slightly positive for mortgage rates. This, along with downgrades to
economic growth forecasts and continued low inflation, helped mortgage
rates move a little lower again this week.
As
expected, the Fed made no change to the fed funds rate and left the
"extended period" language in place. The Fed also downgraded its economic
outlook, saying that the pace of the recovery is likely to be "more
modest in the near term than had been anticipated." In light of this,
the Fed has implemented a new policy to purchase additional securities to
replace maturing securities from its portfolio, instead of letting its
balance sheet shrink. This action will provide a small amount of monetary
stimulus to the economy. Even though the Fed will purchase Treasuries
rather than mortgage-backed securities (MBS), higher Fed demand for bonds in
general supports low mortgage rates.
This
month's most closely watched inflation report showed that inflation is not
a concern right now. In fact, some Fed officials and investors are worried
that inflation will fall too low. The July Consumer Price Index (CPI) rose
0.3% from June, and increased at a 1.2% annual rate. Core CPI, which
excludes food and energy, rose at a slim 0.9% annual rate. The Fed is
believed to be most comfortable when core inflation is rising at a rate
between 1.5% and 2.0% per year. Low inflation is favorable for mortgage
rates.
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