Wednesday’s highly anticipated Fed meeting produced little reaction in mortgage markets, and mortgage rates barely changed during the week. As expected, the Fed ended its cycle of interest rate cuts and held the Fed Funds rate unchanged at 2.0%. In addition, there were no major surprises in the Fed statement, which was entirely consistent with Fed Chief Bernanke’s recent comments. According to the statement, the Fed expects inflation to moderate later this year and next, but uncertainty over the inflation outlook remains high. Meanwhile, the risk of slower economic growth has diminished. The Fed listed the credit crunch and higher energy prices as obstacles for the economy.In reaction to the announcement, investors concluded that the Fed will wait longer to begin raising interest rates. The Fed’s challenge is still to promote economic growth while fighting inflation. For mortgage markets, the negative implications for inflation from higher energy prices were offset by the positive effect on inflation of a slower economy, keeping mortgage rates steady. The stock market did not take the news as well, since higher energy prices and a slower economy are both negative for equities, and the Dow fell to the lowest level of the year.

The current economic data on inflation remained relatively mild, but the threat of higher future inflation climbed. The May Core PCE price index, the Fed’s preferred inflation indicator, rose less than expected. On the other hand, Dow Chemical announced additional across the board price hikes of up to 25%, shortly after a similar 20% increase less than one month ago.

Since mortgage markets will be closed on Friday for the Fourth of July holiday, the important Employment report will come out on Thursday. As usual, this data on the number of new jobs created, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month, since the health of the labor market is p erhaps the single biggest factor in the performance of the economy. Early estimates are for a loss of 50K jobs in June.

The two national manufacturing indexes, the ISM and the Chicago PMI, will be released earlier in the week. Construction Spending, Factory Orders, and ISM Services will round out the schedule. In addition to the economic data, Thursday’s policy announcement from the Bank of England and the European Central Bank may be a major event.