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Douglas Lenski

Fed to Slow Tapering Talk

Friday, June 14, 2013 - Article by: Douglas Lenski - Wholesale Mortgage Services of Wisconsin - Message

Wisconsin Mortgage rates should finally get the reprieve we have been discussing for 2 weeks. This after a Wall Street Journal article stated that Fed Chairman Ben Bernanke next week will try to calm fears that any move to reduce the pace of its bond buying won't mean the Fed is close to ending the program.

This from "The Fed will only start to slow and then unwind its stimulus programs when it's completely comfortable that the economic recovery is self sustaining," AMP Capital head of investment strategy Shane Oliver wrote Friday. More important, said Oliver, the Fed is likely to stress that "interest rate hikes are still a long way away."

Bernanke is scheduled to hold a news conference on Wednesday after the next interest rate decision.

The ultra-low inflation rate could keep the Fed buying bonds for quite a while, contrary to market expectations.

"Labor market conditions have improved since last summer, suggesting the [Federal Open Market Committee] could slow the pace of purchases, but surprisingly low inflation readings may mean the committee can maintain its aggressive program over a longer time frame," said influential centrist James Bullard, the president of the St. Louis Fed in a speech earlier this week.

True, job growth has been stronger than the Fed expected when it announced that it intends to keep interest rates very low until the unemployment rate falls below 6.5%. The jobless rate dropped to 7.5% in April, and even at the current 7.6%, we're months ahead of schedule on returning to full employment.

Unfortunately, at the current pace of job growth, it would take until the end of 2015 for the unemployment rate to fall to 6.5%. And it would take five full years to get the jobless rate down to 5.5%, equivalent to full employment.

We saw more evidence of a softening economy this week. When IBM announced 5000-6000 in layoffs. This comes in the same week when China came out with slowing growth numbers. Today consumer confidence was lower then expected.

We said last week and it is worth repeating that the economy is no where near what is needed to stop QE3. It is nice that the Fed is thinking of an exit strategy. The problem is doing something now would be like a pilot jumping out of a plane just after pulling it out of a dive. The Fed needs to get complete control of the situation and bring the plane down slowly and safely or risk another panic.

Wisconsin Mortgage rates remain in a tight trading range. This after MBS were PLUS 97 bps in the last 24 hours. The rate for a 30 year fixed in Milwaukee should be between 3.75% and 4.25% for the foreseeable future.

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