The Federal Reserve's Federal Open Market Committee (FOMC) issued a statement on October 30 indicating that the committee has voted not to reduce the Fed's monthly purchases of $40 billion in mortgage-backed securities (MBS) and $45 billion in Treasury securities.
In its scheduled post-meeting statement, FOMC indicated that while the economy enjoyed "moderate growth" since its last meeting the committee wants to see more robust economic growth before reducing its monthly asset purchases. FOMC also said that it won't adjust the target federal funds rate, which is currently set at 0.00 percent to 0.250 percent.
The FOMC statement acknowledged a slowing pace of growth in home prices as part of committee's decision not to change the volume of its monthly securities purchases. An unrelated report issued by the National Association of REALTORS® indicated that September pending home sales had decreased due to rising mortgage rates and home prices. Prior to FOMC's September meeting, investors speculated that the Fed would reduce its asset purchases and mortgage rates spiked.
Fed Policy, Wall Street and Mortgage Rates
The monthly securities purchases are part of the Fed's "quantitative easing" policy that was implemented to strengthen the economy, support mortgage markets and to keep mortgage rates and other long-term interest rates low.
Prior to FOMC's September meeting, investors speculated that the Fed would reduce its asset purchases and mortgage rates spiked; This illustrates how Fed policy concerning quantitative easing is closely connected to what happens with mortgage rates, but additional factors also affect financial markets and mortgage rates. While the FOMC intends for its quantitative easing program to help with stabilizing mortgage rates, other factors could cause mortgage rates to rise.
In general, when bond prices fall, mortgage rates rise. When the Fed starts tapering its $85 billion monthly asset purchases, bond prices would likely fall as demand for securities (bonds) would decrease; mortgage rates would likely go higher.
Fed Policy: Looking Ahead
October's FOMC statement indicated that the that the economy is recovering but continues to experience instability, which also influenced the FOMC not to taper its bond purchasing program at this time. Fed will continue monitoring financial and economic conditions "in coming months" and will need to see substantial economic improvement in the context of FOMC's dual mandate of maintaining maximum employment and price stability before it will cut its current volume of monthly asset purchases.
The FOMC reference to "in coming months" suggests that the Fed anticipates making no immediate changes to its bond purchase program, which could allow mortgage rates to remain low as housing markets continue their recovery.