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Fed Confirms End of QE in October 2014

The Federal Reserve released key information today confirming the QE bond purchasing program would indeed be ending in October 2014. However, much of the hype surrounding this particular fed meeting was with regard to the Federal Fund Rate which is the overnight rate at which banks and other large financial institutions borrow money from the federal-reserve. This rate is currently 0-.025% and affects all types of consumer financing.

Recent reports indicated the Fed had changed its pace on when to raise the Federal Fund Rate. Previous stance was 12-24 months after QE (Quantitative Easing) ends. Recent reports stated economic data had improved enough for the Fed to raise the Fund Rate as early as 6 months post QE. Today, the facts were revealed and to very little surprise, The Fed has decided to keep its same verbiage that rates will stay low for a “Considerable time” (12-24 months depending on economic data). This will put ease in the bond markets and keep mortgage bonds from trading below their key levels of support. Rates did go up a bit today based on confirmation that QE would end next month but held support due to the Feds stance on when to raise the Fed Fund Rate.

Ultimately, the Fed is watching 3 main economic indicators. The first being inflation (currently dragging along at 2%). The fed wants to see 3%+ before raising rates. The second is our labor market. Though our unemployment rate has continued to decline, the Fed still sees a large underutilization of jobs in the U.S. economy and wants to see better job growth before raising rates. The third is GDP Growth (Gross Domestic Product) which tells us how fast the economy is growing. Currently GDP growth is dragging along at 2%. The Fed wants to see consistent 3%+ GDP growth before raising interest rates.

We will continue to watch these 3 economic indicators closely and keep a close eye on the bond markets leading up to the last big purchase of mortgage bonds next month. For now, the bond market ended slightly down today (when bonds sell off, the bond depreciates and the rate goes up, therefore interest rates go up) with rates on the 15 and 30 year fixed up .0125% percent from last week.

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