The big news this week was Tuesday’s Fed meeting. As expected, the Fed held the Fed Funds rate at 2.0%, but investors were concerned with the tone of the accompanying statement. The Fed’s challenge is to balance the risk of slower economic growth with the threat of higher inflation. Overall, the statement indicated that the Fed is more concerned with stabilizing the financial system than with fighting inflation. This, combined with Monday’s higher than expected reading on core PCE inflation, led to a small increase in mortgage rates during the week.

The European Central Bank (ECB) also held a policy meeting this week, and they, too, made no change in interest rates. ECB President Trichet’s comments were similar to Bernanke’s, with warnings about the risks of both slower economic growth and higher inflation in Europe. The economic performance of other countries is important for US mortgage markets, since foreign investors purchase a large quantity of US bonds. For example, foreign investors accounted for 43% of the 30-yr issue and 34% of the 10-yr issue in this week’s Treasury auctions.

In the housing sector, the June Pending Home Sales index rose 5% from May. Pending Home Sales are a leading indicator of future housing market activity, so the next Existing and New Home Sales reports may show increases. In addition, the chief economist of the National Association of Realtors (NAR) expects the recently passed Housing Bill to stimulate the housing market later in the year.