Yesterday was a special day. In the late afternoon I visited Costco, which some people feel simultaneously represents everything that is both bad and good about the retail channel. The change in time over the weekend had made it so the setting sun shone through the front entrance, illuminating the Samsung 46 inch plasma, the flannel shirts, AND the pre-lit Christmas tree boxes all at once. It was a tender moment.

What are Fed Funds? These are cash balances held by banks with their local Federal Reserve Bank, typically involved in an “inter-bank sale” of a Fed fund deposit for one business day – overnight. And the Fed Funds Rate is the overnight interest rate charged by those banks with excess reserves on hand. Why would this impact the mortgage rate that James & Jen Borrower pay on their mortgage? They don’t, directly, since the credit profile of a borrower, or house, is more complicated and riskier than a bank with excess funds, and an overnight rate is obviously different than a 30 year rate.

As was expected, the FOMC kept its central message and the Fed Funds rate unchanged, noting that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Of course the current economic conditions are low rates of resource utilization, subdued inflation trends, questionable housing situation, a weak labor market, and stable inflation expectations. The FOMC (Federal Open Market Committee) reduced the size of their Agency debt (bonds issued by the agencies, not directly backed by mortgages) purchase program to “about” $175 billion from $200 billion, but is still set on purchasing $1.25 trillion of agency mortgage-backed securities. Even with this adjustment the Fed balance sheet should peak above $2.6 trillion at the end of March 2010. Yesterday Wall Street dealers reported that mortgages have maintained their bid all session as sellers have been few and far between.

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