The Fed’s Policy Statement – Dissected

by Florida's #1 Mortgage Planner on September 24, 2009

I wasn’t able to get to this last night, but here it is, finally, the dissection of the Fed’s Policy Statement and what it means to you regarding mortgage rates (as always, my comments are in bold)…

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn (but don’t expect a recovery just yet).  Conditions in financial markets have improved further, and activity in the housing sector has increased (we finally are seeing the bottom in the housing market and the financial markets are rebounding…but will reality keep them going?).  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit (in other words, nothing we have done thus far is really working, but we are successful in devaluing the dollar).  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales (it’s called survival mode).  Although economic activity is likely to remain weak for a time (no kidding), the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus (let’s keep throwing good money after bad), and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability (the latter being the real driver of the economic recovery).

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time (that is at least until reality catches up).

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability (all of our spending hasn’t helped much so far, so maybe if we spend more it will finally work).  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period (that is until inflation takes off or another bubble forms due to our actions).  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt (hmmm…maybe the housing recovery is due to those artificially low mortgage rates, so we better keep manipulating them).  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010 (finally, an exit strategy that makes sense and may even prevent the “mortgage rate bubble” from bursting too quickly).  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets (we need to keep manipulating the Treasury securities and likely will have to increase those purchases after October).  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted (hey, if our balance sheets get too low on cash, we’ll just print more and make it look better.  A lesson learned from corporate America).

Ok, so what does this all mean for you as a homeowner and mortgage rates?  Basically, the Fed is going to continue their mortgage backed securities purchasing and that will hold mortgage rates in check, though it may not prevent them from rising.  At least we won’t likely see the “mortgage rate bubble” burst.  At least, not yet.

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