Will mortgage rates be affected by upcoming Fed meeting?by Tim Manni
Fed to purchase Treasuries?
The next Federal Open Market Committee (FOMC) meeting is scheduled for November 2, 2010 — the day of mid-term elections. Unless there’s substantial economic improvement between now and then, it is believed that some announcement will come with regards to the Fed purchasing Treasury obligations (known as Quantitative Easing).
Safer is better
With so much uncertainty in an unpredictable mortgage market, banks and investors have shown quite the appetite for safer investments, like Treasuries. Even with their record low yields, Treasuries provide investors with a guaranteed return (even if it’s a meager one at that). By buying up large amounts of Treasuries, the Fed will essentially be driving those interest rates down. The hope is that the Fed’s Treasury spending spree will force investors to consider other high(er) yielding options for their cash. In turn, that demand for other assets — including mortgage-backed securities — would influence other rates downward, hopefully spurring companies and others to borrow cheap money to invest in factories and projects and such and, by so doing, spurring the economy.
Safety vs risk
There is no guarantee that this will be the case. Investors may still prefer safety over risk, low yield or no. There are already trillions of dollars on the sideline of the economy which are waiting for a place to go and ready to be lent and spent. Unfortunately, there’s no real comfortable place for that money to go, thanks to an uncertain economic, tax and regulatory environment.
What’s the overall impact?
The economic benefits of more Treasury purchases are expected to be slight, and accumulating billions more in assets will make the Fed’s extrication from the markets considerably more tricky, producing concerns about inflationary effects down the road from here.
While the move will likely produce even lower mortgage rates, cheap interest rates mean little if no one wants to (or can qualify to) borrow.
Wheels are already in motion
With the potential for the Fed’s involvement growing, at least some of the effects of their pending actions are already happening. Investors are grabbing today’s higher-yielding Treasuries before the Fed’s influence causes them to fall even lower tomorrow.