Fed Monetary Policy Remains as Higher Rates Signal Concern

The Federal Reserve released a statement today after their FOMC meeting which indicated that the Fed monetary policy will remain the same as higher rates are signaling concern.

According to the statement, economic activity expanded at a "modest" pace during the first half of the year. "The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term," stated by the FOMC. There was a repeat of the pledge to continue asset purchases of $85 billion until there is a substantial improvement in the labor market.

There appears to be great concern towards the rise of mortgage rates which are having an impact on the housing market. Since May, rising rates have affected this sector, especially in housing starts, which is a big part of the gross domestic product, GDP. Housing Starts fell 9.9% in June, according to the Commerce Department. In addition, the lack of refinance activity will decrease disposable cash available to homeowners. Any slowdown in the housing market is a threat to the current and future of economic growth.

Mortgage application activity has been showing the evidence of elevated rates in recent weeks. The Mortgage Bankers Association's Market Composite Index fell by 3.7% on a seasonally adjusted basis for the week ending July 26th. The Refinance Index decreased 4% and is now more than 55% lower than its peak and has hit the lowest level in more than two years. The refinance share of all application activity remains at 63%. However, HARP refinance applications, the Home Affordable Refinance Program, rose to 37% from 34% the previous week.

According to the MBAA report, the Purchase Index decreased 3% on a seasonally adjusted basis, but was still 5% higher than the same time last year. Mortgage applications for home purchase loans fell for the fourth time in five weeks. This also affects government loan activity since many first time home buyers use the FHA mortgage program for financing.

It is clear that the Feds are being very carefully with their statements after seeing the results of just mentioning a taper. Since housing is so closely tied to GDP, any rise in rates will create a decline in housing which will disrupt the economic recovery in the short term. In the long term, it is inevitable that tapering will occur and borrowing rates will rise, however, how to get that accomplished without a bond market crash and major rise in mortgage rates is something that the Feds are trying to avoid.

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