As expected by many market observers, the Federal Open Market Committee raised its target federal funds rate Feb. 2. The 25 basis-point increase doesn't signify that any substantial changes are about to take place in the mortgage market, market observers say.

"My take is that the market is not responding to that at all, to me it's a ho-hum thing," said one mortgage-backed securities trader. "The only question was, would they go 50 basis points and be men about it? I think they wimped out, so we can revisit this again in March. I think they should have done 50 now. I think it was silly."

Other observers said the 25 basis-point increase was expected, and provided some relief that the Fed did not move rates even higher. "This is what the dealer community certainly had been forecasting," said Art Frank, director of mortgage research at Nomura Securities. "The Fed moving 25 is not a big factor one way or the other."

"It's certainly the case that this was a little bit positive," added Freddie Mac chief economist Robert Van Order. "The markets were concerned that the Fed might make a stronger adjustment."

"I didn't see a whole lot changing after the announcement, and I didn't think it should have," the trader said.

Because some traders were expecting a 50-basis point hike, it is likely that the Fed will increase by another 25 basis points at its next meeting in six weeks. In the meantime, expect a small rally in the market. "I think we'll see a slight rally, because the market built in somewhere between 25 and 50 basis points," said Thomas Black, director of secondary marketing at MortgageIT, an online mortgage broker.

"Overall, I think we'll see a lot of volatility over the next six weeks, until the next FOMC meeting," he added. "He's probably going to do another quarter in six weeks, so we'll be tied to whatever news comes out," similar to how the market reacted daily with news during the month of January.

"I think we'll see Fed funds rise up to 6.25% at least," added John Lonski, senior economist at Moody's Investors Service. "I wouldn't rule out the possibility of a higher finds rate if it turns out that the combination of a still -brisk U.S. economy with faster economic growth in the rest of the world, puts unexpected upward pressure on prices of tradable goods."

Lonski added that the increase should slow the originations of mortgages for new homes, but no impact will be seen until the Fed funds are above the nominal gross-domestic-product growth, which is about 6% year-over-year. "So maybe we have to go up to about 6.25% to really trigger a perceptible slowing of mortgage originations of new homes," he said. "However, refinancings remain off sharply."

Observers also said that the Fed announcement was somewhat overshadowed by the Treasury's decision to repurchase its debt, creating wider spreads and an inverted yield curve. (See Market, page 4)

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