FOMC STATEMENT: Fed's MBS Purchase Program on Course to End as Planned, But....

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The FOMC Statement has been released.

First and foremost, there was no significant change in the verbiage regarding the end of the MBS Purchase Program.

Here is how the statement reads:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month"

The text that follows the above statement was slightly adjusted in a manner that leaves the door open for a program extension. 

"The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."

Although this isn't something we haven't seen already, its a sign that the Fed is worried about how their exit will affect mortgage rates. THE DOOR IS STILL OPEN FOR AN EXTENSION

There were a few other "sentiment shifting" statements made too:

  1. Instead of saying "the deterioration  in the labor market is abating", the statement read " the labor market is stabilizing". That is an upgrade to labor market conditions.  
  2. Today's text reads:  "Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.". This statement used to read  "but remains constrained by a weak labor market". This isn't much of an upgrade or a downgrade. However in light of change #1, we have to give the benefit of the doubt to the BULLISH camp.
  3. The FOMC upgraded their stance on business spending. What read "Business spending on equipment and software appears to be picking up" last month...now reads "Business spending on equipment and software has risen significantly". This is a clear cut check in the BULLISH column for stock traders. However I would like to point out that more investing in equipment and software implies less reliance on HUMAN LABOR. That is a negative for prospects of a normal long-term recovery.
  4. We did get new verbiage on housing: "HOUSING STARTS HAVE BEEN FLAT AT DEPRESSED LEVELS". That is a sign that a weak housing market is on the radar of the FOMC. This is a clear cut downgrade to housing.

There was no change in the verbiage referencing the timing of a Fed Funds rate hike, the committee still believes exceptionally low levels of the Fed Funds rate are warranted for an "EXTENDED PERIOD". The Fed did update us on the liquidity programs, saying all but one are now closed. This we already knew...

Thomas Hoenig, who voted against leaving the Fed Funds Rate at 0-0.25% at the January meeting, voted against it again today.  No others dissented.

Plain and Simple: The Fed's feelings on the labor market have improved since the last meeting while housing remains uncomfortably depressed. The MBS purchase program is scheduled to run out of funding at the end of March, as planned....BUT THE DOOR IS STILL OPEN FOR AN EXTENSION.

After the release, the benchmark 10 year TSY note yield fell from 3.68% to 3.65%. That positive progress is holding in place.  Currently the 3.625% coupon bearing 10 year note is +0-12 yielding 3.651%.

 The FN 4.5 spiked up as high as 101-02 before falling back into the recent range. The FN 4.5 is currently +0-04 at 101-00. MBS yield spreads are wider into this rally.

 If 10s maintain the move lower in yield, we should see MBS prices tick back over 101-00.