After last week’s regularly scheduled meeting of the Federal Open Market Committee (FOMC), Fed Chairman Ben Bernanke acknowledged that conditions in our economy are improving modestly, but he noted that the housing market remains depressed. One example of this is new home sales, which fell 7.1% in March to 328,000 units on an annual rate.
Bernanke also noted that inflation is higher in the short-run due to higher energy costs, but that the Fed expects prices to tone down over the longer-term. Remember, inflation hurts the value of fixed investments like bonds (including mortgage bonds, to which homeloan rates are tied) so inflation staying in check is crucial when it comes to home loanrates remaining near record best levels.
One important subject the Fed didn’t mention in their Policy Statement was another round of bond buying to stimulate our economy (known as Quantitative Easing or QE3). This wasn’t much of a surprise because after several moves to prop up the economy the Fed must see where upcoming economic reports go before venturing to underwrite the economy further. If the housing market remains depressed and the economy doesn’t pick up steam, QE3 could be a very real possibility.
There was a bit of a sluggish read on our economy last Friday, after the Fed’s mid-week meeting. The advanced (first of three readings) of Gross Domestic Product (GDP) for the 1st quarter of 2012 came in at 2.2%, well below expectations. This was also well below the 3% final 4th quarter 2011 GDP reading. Within the report it showed that the personal consumption expenditure inflation reading rose at the fastest pace since the 2nd quarter of 2011. This is definitely something the Fed is watching closely.
As 2012 continues to unfold, inflation, the housing market, our sluggish economy, and our ever-growing debt are important issues that the Fed and government need to address. Seeing the debt crisis in Europe escalate puts a sense of urgency on our government to reign in our annual budget deficit and overall debt. This mix of factors will continue to impact the direction in which bonds and home loan rates move in the weeks ahead.
State-by-state Unemployment Chart
As you can see in the chart below, unemployment continues to be a concern around the nation. Watch for the Labor Department’s Jobs Report on Friday, to see how bonds and home loan rates are impacted.
