Heading into Wednesday's highly anticipated Fed meeting, investors were divided about what the Fed statement would reveal. The Fed announced that it will begin to scale back its bond purchase program. The stock market rallied after the news, but mortgage rates rose modestly and ended the week a little higher.
The Fed announced that it will begin to scale back its bond purchases from $85 billion per month to $75 billion. Treasury and MBS purchases each will be reduced by $5 billion per month. Fed officials expect to continue reducing the pace of bond purchases at future meetings depending on the performance of the economy. According to the statement, Fed officials anticipate that the fed funds rate will not be raised until the Unemployment Rate declines "well past" the 6.5% level. The statement also noted some concern that inflation has remained below the Fed's objective of 2.0%, giving them reason to remain highly accommodative. The Fed's decision reflects increased confidence that the economic recovery is sustainable. If unemployment gets worse after the holiday the new chairman could ramp up again.
The housing data released this week revealed that the pace of improvement slowed a bit toward the end of the year, but also provided reasons to be optimistic heading into next year. November Existing Home Sales declined a little from October, and the total inventory of existing homes available for sale also dropped. According to the National Association of Realtors, there is a "pent-up demand" for housing, but tight supply conditions have constrained home purchases. Addressing this issue, home builders are ramping up their pace of construction. November Housing Starts surged 23% from October to the highest level since February 2008. Housing Starts were 30% higher than one year ago. Building Permits also increased in November. The December NAHB Home Builders confidence index jumped to the highest level since August.