It’s all eyes on the Fed today as the market sits patiently, waiting for the 2:15 P.M. EST press release. Despite strong 2006 Q4 growth figures and a five percent spike in oil prices yesterday, there is an eerie calm while markets wait for the FOMC’s press release.

In its December 2006 press release, the FOMC stated that:

Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.

In other words, the group believed that housing slowed down the economy some but, overall, growth would continue at a "Goldilocks" level.

Today, markets expect with 100% certainty that the FOMC will not raise or lower the Fed Funds Rate, but the FFR is not what concerns them; it’s the verbiage of the press release that matters. If the above key paragraph changes to reflect a move away from "just right" growth into "runaway" growth, mortgage rates will adjust higher in response.

60 days ago, markets put a 36% probability that the Fed would lower the Fed Funds Rate by March 2007. Today, that probability is zero. If you’re wondering why mortgage rates have ascended so quickly, that’s part of your answer — inflation expectations are changing.

Rates increased again on Monday and today the market catches its breath. Enjoy the calm and consider locking in your mortgage rate because beginning Wednesday morning at 8:30 A.M. EST, the data onslaught begins.

With several key inflation figures and the Federal Open Market Committee will concluding their two-day meeting, mortgage rates figure to bounce around like a lottery ping-pong ball clear through Friday.

Mortgage bonds continue their slide after yesterday’s outright hysteria.

Today’s New Homes Sales showed a 4.8% jump in December to an annualized pace of 1.12 million homes. This is about 14% higher than July’s pace and some economists are wondering if "housing stability" just turned into "housing rebound". Home supply plummeted from 7.2 months to 5.9 months over the same 5 months.

This week’s housing data is the last piece of economic data that the FOMC will have at its fingertips prior their meeting next week. The Fed will consider housing’s impact most carefully and some traders are already expecting an inflationary pressure warning.

Momentum is against mortgage bonds right now and that is rocketing rates higher.

Existing Home Sales showed weaker-than-expected numbers this morning, but that hasn’t stopped the slide in mortgage-backed securities. This is a counter-intuitive movement so let’s take a deeper look.

First, the supply of homes dropped from 7.3 months to 6.8 months. With less supply, there is a tendency for home values to stabilize and that is exactly what is happening. Median home prices are turning flat versus year-over-year declines during the last quarter of 2006.

Additionally, there is a growing feeling that the housing market has already bottomed-out and that the worst is behind us. A re-energized housing market will fuel additional economic growth in 2007.

Tomorrow, New Home Sales data will be released and the markets will respond in a similar fashion to today’s data. Weak or strong, the markets are looking for signs of strength and that is exactly what they’ll find.

Mortgage rates are higher on the day already.