Today the FOMC will make their policy announcement (11:00 AM PST) and while we expect rates to remain unchanged the big issue will be LSAP reduction and any amendments to forward guidance. With the Fed keeping a close eye on the state of the economy, and the recent run of disappointing data, we could see divergence from the projected $10 billion reduction per meeting. The purchase index rose 2% vs. -4% prior and is down 12% YoY. It is likely that the recent dip in mortgage rates is fueling demand for purchases. The average rate for conforming mortgages fell 5 bps this week touching the lowest levels since November. A flatter curve has developed with 2s10s down 1 bps.
“The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.”
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