The Federal Open Market Committee (FOMC) released it's monetary policy decision today which was exactly as the markets had planned: no change to benchmark lending rates.  Even if they had raised rates, it wouldn't necessarily be bad news for mortgages as the Fed rates are not directly tied to mortgages.  What is always highly significant when the Fed Funds Futures are almost certain of the outcome in terms of rate change is the accompanying monetary policy statement which is a carefully scripted glimpse into the future leanings of the Fed's monetary policy statements. 

If traders feel like they can divine the Fed's attitudes before those attitudes are explicitly stated, they will try to get an advantage over the rest of the market by betting on their assumptions.  It's the fact that cryptic and carefully scripted language is so open to varying interpretation that creates significant volatility leading up to and immediately following an FOMC announcement.  Perennially, the volatility is higher following the statement than leading up to the statement, but we did not see that as much this time around.  For a full text of the statement and detailed analysis of the statement, check the professional blog about mid-way down the page.  Some of the terminology will be a bit abstruse for non-mortgage professionals, but it will certainly show you at least one analyst's opinions on today's statement.

so what was the backdrop leading up to today's statement?

News and Numbers

• As of late, Mortgage Backed Securities (MBS), the financial instrument from which mortgages directly get their pricing cues, have been extremely volatile.  The shake up with Fannie Mae and Freddie Mac (collectively GSE's), ongoing inflation concerns, the failure of Indymac, the trend of historically low buying demand in conjunction with historically high value, and not to mention the general economic climate that somewhat rightfully demonizes all things mortgage-related, have all contributed to this volatility.  Buying demand decreases which in turn lowers prices.  This trend can cause yet more selling.  But there comes a point at which so much selling has occurred (rising rates) that the yield on these MBS for investors is too high to pass up so we see a small and brief increase in buying which brings rates back down.
• In general the scheduled economic data since the last time we spoke has been stronger than anticipated.  In general, stronger than expected data is bad for rates, combine that with the factors discussed above and the "value" argument created by the high spreads has not been able to sufficiently fight off the selling demand.  Nonetheless, MBS have held up admirably considering the antagonists, today is no exception.
• The stock market made an early assumption that it was going to hear what it wanted to hear from the Fed.  They were right.  The statement was innocuous, and if one reads between the lines, we can see that it is less threatening than the previous statement both with respect to economic growth and inflation, the Fed's two primary concerns.  Even before the announcement stocks were off to the races.  After the announcement and by the end of the day, the Dow had crested the 300 point gain mark, a bullish day indeed.
• Normally when stocks gain, bonds suffer as money is generally pulled out of one to invest in the other.  But because so much "position taking" (the phenomenon of traders liquidating security holdings with the intent of investing that money in other securities) occurs pre-fed, there was excess money "on the sidelines" waiting to be pumped back into both sides of the market.  because of this, both stocks and gained after the announcement. 
  
• But eventually, stocks became too rich for bond's blood and the volume of money flowing into the stock side began to draw money out of bonds.  How much of this was a "sugar high" and how much of it is justified bullishness remains to be seen during the rest of the week.

What Now?

Last time we talked we discussed that short term risks favored locking due to volatility.  If you took that advice, you would be well rewarded today as rates are significantly worse than last week.  But we have pared enough of the dollar price on MBS that the predisposition towards locking may change depending on tomorrow's momentum.  For instance, if it does become apparent that stock strength is, in fact, a "sugar high" (meaning that these gains are sweet, but also short and not indicative of a prolonged supply of energy (from a delicious balanced diet including whatever the economic equivalent of complex carbohydrates would be)), then the fact that a lot of volatility concern was allayed today with the Fed's relatively calm policy statement combined with potentially waning stock interest could give way to increasing bond prices, which is good for rates.

But again, the final word (which unfortunately is never really final) on this will be more apparent when we see how the markets feel "the morning after."

As for the short term again, some of the technical indicators are reading very negatively, suggesting rates may rise further.  Look for confirmation or refutation of this tomorrow, if not here then certainly in the professional blog.