Fed Downgrades Economic Outlook for the Remainder of 2010

Taila Gillespie, Realtor - Coldwell Banker Del Mar
July 15, 2010 (www.Philadelphiainquirer.com)

Federal Reserve officials cut their forecasts for growth this year and signaled they stood ready to take steps to keep the recovery alive if the economy worsens. Minutes of the Fed's latest meeting, released Wednesday, revealed a more cautious mood among the Fed policymakers in light of Europe's debt crisis, a volatile Wall Street, a stalled housing market, and stubbornly high unemployment.
With risks increasing, Fed officials at their June 22 and 23 meeting said there was a need to explore additional options for bolstering the economy. That is a turnaround from earlier this year, when they were moving to wind down crisis-era initiatives.

No specific steps were disclosed or agreed upon at that time. However, if the recovery were to deteriorate, Fed policymakers have options. They could revive programs to buy mortgage securities or government debt. They could lower the rates banks pay for emergency Fed loans. Both steps would put more money into the financial system.

The Fed also could create a program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and expand the economy. "If the economy takes a nasty spill, then yes, it would take new policy action. But if we continue to see kind of mediocre, ho-hum growth, then that won't be enough for them to move," said Michael Feroli, an economist at JPMorgan Chase.
In the end, Fed Chairman Ben S. Bernanke and his colleagues agreed at the June meeting to hold a key interest rate at a record low near zero to help energize the economy. And they repeated a pledge to keep rates there for an "extended period."

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Weak Economic Growth Helps Mortgage Rates

After dropping to the lowest level in decades last week, mortgage rates fell even further this week. Weak economic data from the US, Europe, and China caused investors to question the pace of the global economic recovery. Slower economic growth was positive for mortgage rates and negative for the stock market.

Friday's important Employment report reflected a slowly improving labor market. The economy lost -125K jobs in June, which was very close to expectations. The figures include a loss of -225K census workers who completed their temporary assignments. The private sector added 83K jobs. The Unemployment Rate fell to 9.5% from 9.7% in May, but this was due to 650K people leaving the labor force. The labor force consists of everyone in the US who either has a job or is looking for one, and the Unemployment Rate measures the percentage of the labor force without jobs.

There was mixed news in the housing sector this week. May Pending Home Sales declined 30% from April, as many buyers rushed to sign contracts ahead of the April 30 deadline to qualify for the home buyer tax credit. On a more positive note, the "close-by" deadline for the home buyer tax credit has been extended to September 30. Although the tax credit is not available for new contracts signed after April 30, extremely low mortgage rates and high home affordability levels make conditions very favorable for home purchases.