Economic Commentary for October 31st, 2013: Fed Policy Unchanged

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Weaker than expected economic data was favorable for mortgage rates this week. A slight upward revision to the Fed’s outlook for the economy hurt rates, however. In the end, the two offsetting influences left mortgage rates nearly unchanged for the week.

As expected, the Fed statement revealed no policy changes. A bit more surprising was that the Fed’s outlook for the economy was a little more bullish than in the prior statement. Despite this, Fed officials intend to wait for more signs of sustained improvement in the economy before reducing their bond purchases. The added demand for mortgage-backed securities (MBS) from the Fed’s purchase program has been a major factor helping to keep mortgage rates low.

In addition to the extra demand from the Fed, another factor helping to keep mortgage rates low is the modest level of inflation. Mortgage rates typically exceed the anticipated future inflation rate by a margin. As inflation expectations rise and fall, so do rates. Recent inflation measures have shown little upward pressure. Both the Consumer Price Index and the Producer Price Index for September showed that annual inflation rates remain firmly below 2.0%.

Over the next couple of weeks, the Economic Calendar will be busier than usual, as the remaining economic reports delayed by the government shutdown will be released. The most significant report will be the monthly Employment data which will be released on November 8. Third quarter Gross Domestic Product (GDP), the broadest measure of economic growth, will come out on November 7. The challenge for investors will be to sort out the impact of the government shutdown on the data to determine the underlying strength of the economy.

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