Dedham Condominiums

The Federal Reserve's Open Market Committee on Thursday raised the target for the federal funds rate by a quarter percentage point, to 3.25 percent, matching market expectations.

In its closely watched accompanying statement, the Fed retained the "measured" pace verbiage, suggesting it will continue edging rates upward and likely will increase rates another quarter-point at its next meeting on August 9.

The move, the Fed's ninth consecutive quarter-point increase in the last year, was widely anticipated and elicited little immediate response from the U.S. financial markets.

Mortgage Rates Don't Change
Submitted Jun 29 2005 5:00PM CST

Mortgage rates held their ground on Wednesday as the financial markets marked time ahead of Thursday's Fed announcement on interest rates. U.S. Treasury securities appeared to be poised for a rally early in the session, but a case of the pre-Fed jitters paired with profit taking, a reluctance to add positions prior to the decision, and a disappointing auction of 2-year notes resulted in mild selling.

The Fed convened its two-day meeting today - one of two such occurrences each year - in preparation for the semi-annual testimony on Capitol Hill. Although it is widely expected that the Fed will hike its target lending rate by 25 basis points - the ninth such move in the past year - the markets will focus on the statement, combing it for hints as to future intentions. Another rate increase is expected in August, but after that there is no clear consensus of intent.

Prices of Treasuries edged down in the wake of light selling and sent yields, which move in the opposite direction of prices, up. The slight increase in yields that lenders base mortgage rates on had no effect, and rates remained unchanged.

Bullish GDP and Drop in Oil Can't Calm Markets

The final revision of the first-quarter Gross Domestic Product (GDP) showed stronger-than-expected economic growth, cementing any doubt that the Fed will raise rates. GDP climbed to 3.8 percent, matching fourth-quarter gains. Substantial growth in homebuilding and an increase in exports propped up the final numbers. The other positive component was the Personal Consumption Expenditure (PCE) - one of the Fed's favored inflation gauges. It showed an annual gain of 2.0 percent, which was revised downward from the previous 2.2-percent reading. The PCE was higher than the fourth-quarter reading showing a 1.7-percent gain. The GDP report sent stocks up and Treasury yields down at opening, but optimism faded quickly.

The oil inventory report showed unexpected strength, with inventories of crude up 1.1 million barrels, when a decline of 1.4 million was expected. Reserves of gasoline and distillates (heating oil) were also slightly above estimates. The price of oil continued its decline after setting a record on Monday, but it had little effect on the markets. Both the Dow Jones Industrials and the Nasdaq composite closed near their lowest levels of the session.

Only seven of the Dow Jones components closed in positive territory, with embattled AIG, the insurance giant, leading the way with a 6-percent gain due to improved quarterly results. Hewlett-Packard added 1.7 percent and SBC was up 1 percent, but other gains were minimal. Of the 23 components that closed in negative territory, seven posted losses of more than 1 percent.

Oracle paced the Nasdaq with a 6.2-percent increase after beating sales and earnings estimates. And Sun Microsystems and Cisco Systems added about 1.5-percent each. Yahoo! was the biggest loser of the tech bellwethers, dropping 2.2 percent. JDS Uniphase, Ericsson, IBM and Intel suffered modest losses.

At Closing:

The Dow 30 Industrial Index fell 31.15 points or 0.30 percent to end at 10,374.48; the Nasdaq Composite index lost 1.00 points or 0.05 percent to close at 2,068.89, and the benchmark Standard & Poor's 500 Index closed down 1.72 points or 0.14 percent to end at 1,199.85.

The 30-year Treasury bond was down 7/32 in price with the yield rising to 4.26 percent versus a 4.24-percent closing on Tuesday.

The 10-year Treasury note was down 2/32 in price with the yield rising to 3.98 percent versus a 3.97-percent closing on Tuesday.

The 5-year Treasury note closed even in price with the yield holding at 3.75 percent, the same as on Tuesday.

AVERAGE mortgage rates (zero discount points) based on rates collected nationwide were:

The 30-year Conventional Fixed-Rate Mortgage was at 5.374 percent from 5.38 percent at Tuesday's close.

The 15-year Conventional Fixed-Rate Mortgage was at 4.963 percent from 4.973 percent at Tuesday's close.

Coming Up

The Federal Open Markets Committee will announce its decision on interest rates at 2:15 p.m. EDT on Thursday, and the markets will be waiting for the statement that follows as they try to discern the Fed's future intentions. Also due are first-time unemployment claims for the week ended June 24 and Personal Incomes/Outlays that can impact the markets due to an inflation indicator buried in the report. Also due is the Chicago PMI index on June business conditions in that region. The PMI index is expected to climb to 56 from the 54.1 reading in May. Unemployment claims are also predicted to rise to 330,000 from 314,000 the previous week. Forecasts show personal income and spending should decline for May, with income dipping to a plus 0.4 percent from a plus 0.7 percent in April. Spending is expected to come in plus 0.1 percent, down from the plus 0.6 percent reported in April. A lot will be riding on the Fed statement, but overnight and into Thursday mortgage rates should remain steady.

Carolyn Siegel

carolyn@interest.com

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