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Monday, September 20, 2010
DIY investors need to keep an eye on the Fed and, in particular, the committee that sets monetary policy - the FOMC. FOMC stands for "Federal Open Market Committee." By going to the Econoday calendar at the Bloomberg site, you see that, on Tuesday of this week at 2:15 pm (this is approximate), the FOMC will release a statement. The statement gives a short blurb on policy actions, if any, and short commentary on economic conditions the committee considered. It also will hint at which direction they are leaning - towards increasing or decreasing short-term interest rates.
If you are interested in the 3-ring circus surrounding this event, tune into CNBC at 2:10 pm, or so, to see the usual talking heads - bond gurus, ex. Fed governors, and economists - parse the Fed statement and make a huge deal out of any slight change in the Fed's wording.
The specific rate they target is the federal funds rate. This is the rate banks charge each other to borrow and lend reserves. Banks with excess reserves can lend at this rate to banks deficient in reserves. The rate is important because rates are linked. A bank with excess reserves can do a lot of things with excess reserves: it can make a loan (at least they considered this in the past!); it can buy Treasury bills; it can hold the reserves at the Fed.
Longer-term rates are less influenced by the Fed's actions in the short-term market and are more influenced by inflation expectations. Thus, though the Fed's manipulating of the federal funds target will have some influence on 30 year fixed rate mortgages, the bigger influence will be the rise or fall of expected inflation - at least this is the way it used to be.
Today the Fed has pretty much run out of room on the federal funds rate with the target at 0.25% and has turned to what is called "quantitative easing"--the buying of longer-term mortgage-backed and Treasury securities in the market. If any kind of hint is given in the Fed statement on movement in this area, it will be news. On the rate front, market participants expect their posture of keeping rates low for an extended period (until employment shows meaningful improvement) will remain in place.