Wednesday’s Economic Update, Rates and the Fed … The Energy Information Administration reported crude oil inventories in the U.S. increased by 9.6 million barrels to a new record of 458.5 million barrels in the week ended March 13. Analysts had expected an increase of just 4.4 million barrels. The amount of oil production in the U.S. also increased to a rate of 9.42 million barrels a day, the sixth consecutive week of rising production. This news led to a 2.6% decline in West Texas Intermediate crude oil sending prices to a low of $42.34 per barrel while triggering selling pressure in the stock market and modest buying in bonds ahead of the Fed’s monetary policy decision.
However, once the Fed policy statement was released at 2:00 p.m. ET the Dow Jones Industrials shot higher from over 128 points down to 173 points higher, a 300 point swing. Mortgage bonds also reacted by shooting skyward with the FNMA 30-year 3% moving 50 basis points higher while the 10-year Treasury yield moved 8 basis points lower. The reason for these large price swings? The Fed, as largely anticipated, dropped the key word “patient” from its policy statement, giving itself greater flexibility for the timing of its first interest rate hike in nine years.
Investors and traders focused on a couple of key statements including the following. “This change in the forward guidance does not indicate that the committee has decided on the timing of the initial increase.” The Fed’s statement also read “The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective.” Although the word “patient” was removed from the statement, the FOMC recognized that the economy has “moderated somewhat.” As a result, the 2015 GDP forecast was reduced to 2.3% from 2.7%. The cautious commentary on the economy contained within the policy statement offset the impact of dropping the call for “patience,” and this was the catalyst for the financial markets to rocket higher. With the U.S. dollar surging higher, crude oil prices continuing to plummet, and recent economic data showing signs of deflation rather than inflation, it seems unlikely the Fed would have the justification to raise rates anytime soon.
In mortgage news, the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 13, 2015 showed applications fell 3.9% from one week earlier. The Refinance Index retreated 5% from the prior week while the Purchase Index fell 2% from one week earlier. The refinance share of mortgage activity fell to 59% of total applications, the lowest level since October 2014, from 60 percent the prior week. The adjustable-rate mortgage share of activity dropped to 5.5% of total applications.