Federal Reserve ramps up purchases of longer-term debt.  Members of the Federal Open Market Committee (FOMC) voted to keep the federal funds rate target at 0 to ¼ percent and announced that the Federal Reserve would significantly increase its purchases of mortgage-backed securities (MBS) and debt issued by Fannie Mae and Freddie Mac and longer-term Treasury bills.  The MBS and debt purchases are intended to encourage mortgage lending and restore confidence to housing markets.  Purchasing mortgage-backed securities supports their price and lowers the return that the GSEs must pay investors. It also maintains the liquidity in the market for those MBS.  Purchasing Fannie and Freddie debt complements this process by helping to reduce the borrowing costs (interest rates) for the two GSEs.  The purchase of Treasury debt in the 2- and 10-year range aims at reducing the cost of longer-term term borrowing in general, which will also aid mortgage borrowers.  This recent announcement builds upon a strategy that the Fed has pursued since the beginning of the year.  Since then, the Federal Reserve increased its holdings of MBS to just under $240 billion and doubled its holdings of agency securities to $45 billion.  In that time, 30-year mortgage rates have fluctuated, initially rising through early February but then falling to 5.31 percent for the week of March 18. (See Chart)

Consumer and producer prices increase modestly in February.  In separate surveys, the Bureau of Labor Statistics reported that producer prices increased 0.1 percent and consumer prices increased 0.4 percent (both seasonally adjusted) from January to February.  The Producer Price Index for Finished Goods (PPI) showed that wholesale prices rose by a lower amount than in January, weighed down by a 1.6 percent drop in food prices.  The uptick in the Consumer Price Index for all Urban Consumers (CPI-U) was largely due to an 8.3 percent over-the-month increase in the price of gasoline, accounting for two-thirds of the overall index increase. The core-CPI, which excludes volatile energy and food prices, rose 0.2 percent.  The core index is watched closely as a bellwether for price inflation and this month’s increase, which surpassed expectations, may help to mitigate fears of deflation.  Nevertheless, there is no doubt that consumer price growth has moderated substantially over the past year, with core inflation in the fourth quarter slowing to 0.2 percent from 0.7 percent the quarter prior.

Rise in housing starts fueled by multi-unit construction.  The pace of private home construction rose 22.2 percent from January to February, according to a recent release on housing starts from the Census Bureau.  While there was general relief that the February increase halted seven straight months of consecutive declines, the increase was due almost entirely to an 82 percent increase in multi-unit construction, a component which often delivers more volatility to the monthly reading.  Construction of single-family homes, on the other hand, inched up 1.1 percent from a record low in January; they are still more than 50 percent below last February’s pace.