Rate Snapshot: Fed cautious about raising rates too soon

by 19 Feb 2015

By David Shirmeyer, CEO at Sigma Research

The minutes from the Jan 28th meeting were released yesterday and included 37 pages of garble and little interest. The two paragraphs below are all you need to know, the rest is headed for the waste basket as it was more of the boiler plate we plow through every time the minutes are released.

 “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼%target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.”(emphasis mine)

Most of the economists and analysts were thinking the Fed would signal a rate hike in June and remove the “patient” word from the previous meeting. That the word stayed in rallied the bond and mortgage markets on the initial response. Looks like as we have noted previously, the Fed isn’t in any hurry to increase rates until the obvious surfaces that the economy is improving. There was a comment that the lower crude prices could be a determent to economic growth, the opposite of what the consensus has been.
Early yesterday MBA reported mortgage applications last week dived 13.2% frm the previous week that saw apps decline 9.%. Just a fraction higher in interest rates shuts down an already soft housing sector. The Refinance Index decreased 16% from the previous week. The seasonally adjusted Purchase Index decreased 7% from one week earlier.

The refinance share of mortgage activity decreased to 66% of total applications from 69% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 5.3% of total applications. The FHA share of total applications increased to 15.2% this week from 14.1% last week. The VA share of total applications decreased to 8.0% this week from 8.3% last week. We will give it a pass with the heavy weather in the NE and Mid-West (as noted yesterday the weather is now in play for the economic data).
We won’t bore you with the Greek tragedy, some negotiations going on. We are on it though and whenever the issue begins to affect the markets we will let you know with details; in the meantime you need not care about it. Ditto on the Ukraine/Russia mess. Where our focus is now, is the middle east that is developing into a serious crisis for the US and Israel. The entire region is being drawn in to what may turn into a huge ethnic battle that could well redraw the maps in the region. Nothing so far but we are following the developments closely, as everyone should be doing.
Weekly jobless claims, which will be released today, are expected down 14K to 290K, weather will likely distort the report. At 10:00 the Feb Philadelphia Fed business index, expected at 8.2 frm 6.3 in Jan. Also at 10:00 Jan leading economic indicators expected up 0.3%
Although the bond market got a bounce on the FOMC minutes yesterday afternoon, the market remains bearish for the near term. As noted this morning the market for MBSs and treasuries is currently oversold, some retracement is expected. If you hold loans that benefited frm today’s rally you may float, worse case is losing the gains from this afternoon. Although the near term is bearish, and we are mostly concerned with the near term; the longer outlook is still bullish in our opinion.

The US stock market is becoming too expensive regardless of what CNBC and its guests espouse. We will take it as it comes but we hold that interest rates are not going to increase much, and that there is the likelihood that rates will see another downturn, the unanswered question is when. With the US equity market the only place to invest for most investors the stock indexes can easily defy gravity longer than is reasonable.