The Fed’s Policy Statement and What it Means for Mortgage Rates

by Florida's #1 Mortgage Planner on January 28, 2009

This afternoon, about 15 minutes ago, we saw the FOMC release their Fed Funds Rate decision, which was to leave rates unchanged.  That was clearly expected since they cannot go any lower without the Fed actually paying banks to borrow the money, which I wouldn’t put past them.  But why are mortgage rates headed lower as a result?  And will they stay low or persistently climb?

To find out these answers, let’s dissect what the Fed had to say in their Policy Statement:

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. (no surprise here)

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. (again, no surprises for those reading headlines) Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. (the banks and lending institutions continue to hoard the bailout money)  The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant. (mortgage backed securities like this kind of report)

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. (more good news for mortgage rates)  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term. (the good news just keeps coming)

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. (uh-oh, things just got scary again, knowing Bernanke wants inflation badly)  The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. (read: we will continue to create money out of thin air until things get better, no matter what the cost) The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets (not to mention artificially propping the markets and creating another bubble), and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. (so the government will buyback their own debt with new debt?)  The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. (now they are going to extend the TASLF beyond what it was intended, further taking their authority beyond what they may legally be able to do, and certainly beyond what was intended when the Federal Reserve Act was created) The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

There you have it, the government printing presses will be running around the clock at full steam for as long as it takes, and no matter the cost to taxpayers, nor the end results in the form of inflation.  Overall, mortgage rates should be heading lower, but you can see inflationary fears are again returning to the markets. 

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