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June 24th, 2009

FOMC Wants to Keep Interest Rates Low

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The Federal Open Market Committee (FOMC) will conclude its two-day meeting this afternoon. Immediately following the meeting the committee will release a short but telling statement which will summarize the Fed’s intended actions, decisions, and opinions in terms of the economy and our path to recovery.

First off, the overall consensus is that the Fed wants to keep interest rates low. The target for the Fed funds rate is widely expected to remain between 0-0.25%. Mortgage rates are also expected to remain in the range they have fluctuated in over the past several months. Joshua Zumbrun of Forbes.com reports that the Fed has already purchased $455 billion of mortgage-backed securities (MBS), and stands to purchase another $795 billion if they plan on sticking to their original goal of buying up $1.25 trillion. In six months the Fed has purchased an average of over $17 billion in MBS a week. At that pace the program should run at least through the end of the year:

Between the Treasuries, mortgage-backed securities and [Fannie and Freddie] debt, the Federal Reserve has already committed to $1.75 trillion in purchases, but has yet to actually complete half that volume. Thus, observers see little reason for the Fed to try to goose markets by increasing the targets even further. Decreasing purchases would be equivalent to increasing rates, something the Fed is unlikely to do in the face of economic weakness.

Of all the government’s recession-fighting strategies, the Fed’s have been regarded as the most effective. While the programs have certainly served a significant purpose, analysts continue to wait for the next piece of the puzzle: an exit strategy.

The more optimistic you are about our economic recovery, the more you are interested about hearing how the Fed plans to ease off their spending spree. Experts like HSH’s VP Keith Gumbinger believe the Fed owes us, at least, an explanation on how they plan on withdrawing themselves from the market.

“Right now, we don’t need specifics, just that they are considering how to extricate themselves from the various markets that they are supporting,” said Gumbinger.

The Fed’s statement following the FOMC meetings is short and sometimes vague — the minutes which are released two weeks after the meeting’s conclusion tell a more detailed story. We predict that today’s statement will emphasize the importance of the Fed’s ongoing initiatives without announcing any new ones. They will likely note that while the economy has stopped worsening, it hasn’t yet shown strong signs of improving either.

Unemployment and inflation are also likely to be addressed, but we’ll have to wait and see if the Fed thinks we’re ready to end this downturn on our own.

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8 Responses to “FOMC Wants to Keep Interest Rates Low”

  1. Pauk Says: June 24th, 2009 at 11:56 am

    The article states: “Mortgage rates are also expected to remain in the range they have fluctuated in over the past several months”

    What does that really mean?

    May rates and June rates are drastically different in my mind. I’ve read here that you don’t expect to see rates available at a valuable cost mid 4% rate range or slightly higher as we have seen in May (4.5 – 4.75).

    Yet, this article suggests there is a possibility of fluctuations seen in the past couple of months which would indicate that those historic lows at good value might present themselves again.

    Curious to hear predictions — to be fair, I suppose it would be following the latest announcement this afternoon

  2. Tim Manni Says: June 24th, 2009 at 12:44 pm

    Pauk,

    We agree that “May rates and June rates are drastically different…” One represents the bottom and one represents the top of the range. By our calculations and reporting, rates bottomed out at 5% and rates topped out at 5.81%. So for us to say that rates are likely, or expected, to remain between that range is certainly logical.

    Yet, this article suggests there is a possibility of fluctuations seen in the past couple of months which would indicate that those historic lows at good value might present themselves again. — Exactly. Yesterday’s rate ended at 5.59% — that still historically low, that’s still a great deal! Rates don’t have to be below or at 5% to be a good deal.

    One of the main reasons that rates are at where they are, or were at where they were, is because the Fed has spent billions on MBS, and as of now, have plans to continue to do so. If the Fed purchases MBS at their current pace, rates could go back to their May lows or rise to their June highs. If the Fed slows their purchase pace, rates could trend upwards, and vice versa. Also remember, improving economic conditions are causing rates to trend upwards.

    We don’t want consumers to think the only “valuable cost” for rates is the mid 4% range. If people want those rates then a couple things will have to happen: a major bank failure, drastically worst economic conditions, plummeting stock market, etc.

    Thanks for commenting,
    Tim

  3. Pauk Says: June 24th, 2009 at 2:56 pm

    I understand your point Tim.

    Certainly, the rates that we see are fantastic and ARE historical in their value. Most especially for new home purchases.

    I guess the point I’m driving at is that many homeowners have already gotten these types of rates as many as 5 years ago so for those they need even more value to benefit from a refinance.

    This would seemingly amount to a fairly large demographic existing in society. So for these people who own homes and are looking at a refinance, they have to see the rates dip into the 4% to get the value they would need to find relief.

    Instead, they get to watch the bail-out era and scores of irresponsible buyers receive assistance, yet they can’t get refinance rates available to free up their money so that it can hit the market and/or hit the economy via disposable income streams.

    In that, I think our government is missing the mark in ’stimulating’ the economy.

    fair point?

  4. Tim Manni Says: June 25th, 2009 at 11:56 am

    Pauk,

    It’s a fair point, but consider this: So people, a few years ago (or however many it was), refinanced to rates in, near, or around 5%-5.99% — so now they need to refi in the 4% range to really save some money. Say that happens, what will occur in another couple of years when everyone already has rates in the fours, rates will have to dip in the 3% to make a impact for all the homeowners who have a mortgage in the 4% range. In 20 years the ave rate could be 3% — and there’s only so much rates can fall after that.

    Now I know I’m sounding completely unsympathetic, but before we know it, borrowers will be demanding rates of 2%. This housing crisis is unique, extraordinary and it has called for strategies and solutions that will have to be extraordinary — unfortunately we really haven’t found one that works all that well. We just need to be careful that the solution we choose doesn’t negatively impact on the future of the market.

    You are completely right — “our government is missing the mark in ’stimulating’ the economy.” Checks didn’t work, less taxes haven’t worked yet, we don’t know the $787 billion package will work either.

    Is this a storm we’re going to have to ride out on our own? If you (not you specifically) are of the assumption that the economy will work itself out before Obama’s stimulus package takes full effect, than maybe we are on our own…

    Great hearing from you, sorry it took me so long to get back to you,
    Tim

  5. Pauk Says: June 25th, 2009 at 12:29 pm

    I do agree with you and I also and of the mindset that the economy will ebb and flow and that “in general”, less government involvment the better.

    Now, the latest developments are unique in that there are several severe examples of misconduct.

    <>

    All of that said — if we are bailing people out and government is going to get involved, let alone nationalize to a degree — it is shameful that solutions are presented for the irresponsible and not much thought is going towards ways they could further provide relief to the responsible.

    You mention that we need to be careful that “the solution we choose doesn’t negatively impact on the future of the market.” — Unfortunately the way the Government addresses this thought process is to help and reward those who continue to make poor decisions, not those who make good decisions.

    At what point do we pull back from continuing to make it easy to not be responsible.

    Housing (lending) crisis is only one example.

    Wellfare could be more closely monitored and recipients should be required to fulfill more specific and society benefitting criteria.

    Education – we continue to throw money at things without addressing the core of the issue and looking for ways to making parents and children partner with their teachers. We can throw money at it all we want but until we spend smarter and partner together we won’t solve the problem.

    But, it is easy to throw money at things, it’s much harder to work harder, smarter, more efficient and make tough choices.

  6. Tim Manni Says: June 25th, 2009 at 5:08 pm

    Pauk,

    I hear you. My statement, “We just need to be careful that the solution we choose doesn’t negatively impact on the future of the market,” was rather hollow, and didn’t really convey that we already have instituted solutions that will affect us negatively in the future — so great call there.

    If you think about it, and I do understand your point, most of the housing-rescue initiatives cater to the irresponsible (let’s not forget that the recession has also turned good borrowers into bad against their will — unemployment, falling home prices, etc). The bank bailouts, same thing.

    Consider the auto bailouts! How many billions did we pour down GM’s drain before they began to realize that the company isn’t getting any better, only worse. You’re right, the list goes on and on (wellfare, education, etc.)

    Besides offering 4% mortgage rates, what can we do for the responsible American who’s struggling? What’s the solution?
    I only wish I knew.

    *I’d really like to hear your thoughts on our latest blog post regarding what transpired between our Fed and Treasury officials and the BofA/Merrill merger. Paulson said he threatened Ken Lewis’ job on Bernanke behalf, Bernanke says the Fed did nothing wrong…Another example of what happens when the gov. gets involved and there’s billions of dollars at stake.

    I’ve really enjoyed this discussion, thanks, hope to hear from you again soon,
    Tim

  7. Alessandro Machi Says: June 26th, 2009 at 5:40 pm

    Interest rates low for whom?

    How about the almost one trillion dollars in consumer credit card debt that is being taxed, er, charged interest at a 30% rate, is that interest rate being lowered? No, it is being raised.

    http://www.daily-protest.com

  8. Tim Manni Says: June 29th, 2009 at 11:19 am

    Alessandro,

    Credit card companies charge what they want, but when the Fed keeps interest rates low, it does create the incentive for banks to lend. If consumers don’t like being charged 30%, they should stop doing business with that company.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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