The Fed strikes again!by Tim Manni
The Fed strikes again
Yesterday the Federal Open Market Committee announced plans to spend $600 billion by the second quarter of 2011 on newly-issued Treasuries, and another $250-$300 billion on Treasuries purchased with proceeds of the maturing mortgage-backed securities (MBS) they purchased over the last few years. Overall, the Fed will be spending about $100 billion a month on new and existing Treasuries.
From the FOMC statement:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
What’s the purpose?
The purpose of the Fed’s move to purchase billions in long-term Treasuries is to drive down the cost of interest rates. The move is known as “Quantitative Easing.” Here’s how it works: As the Fed buys more and more long-term Treasuries, the yields on these investments will fall even lower than where they sit right now. The goal is to drive the interest rates on these Treasuries so low that investors will begin looking for other higher-yielding investments to put their money in; mortgages are just one of those other areas.
Currently, there are billions and billions of investor dollars sitting on the sidelines. The Fed will have accomplished their goal if they can move a sizable portion of this cash from the sidelines and into the investing playing field.
Will it work?
No one knows. What’s the immediate impact? Again, no one knows at this point. So far the stock market has reacted favorably to the Fed’s decision. We’ll continue to keep a close eye on long-term Treasury yields to see if they fall as substantially as the Fed hopes. As of this morning, the 10-year T-note is down just 0.10 percent.
“The market has reacted favorably so far,” said HSH.com VP Keith Gumbinger. “But it remains to be seen how much effect there will be going forward.”
Last time vs this time
When the Fed purchased $1.25 trillion of MBS from December 2008 to March 2010, that purchase program was designed to support one singular market — the mortgage market. Yesterday’s announcement is designed to support the economy as a whole.
Here’s what worries me: When the Fed announced their plan to purchase what ended up being over a trillion dollars in MBS and Treasuries in 2008, it was at a time when our economy was in horrible shape. What does it say for the current state of our economy that the Fed has had to once again step in with a nearly an equal-sized purchase program? Again, this effort isn’t just for the mortgage market, it’s designed to prop up the overall economy. Two percent economic growth isn’t much, but it’s hardly an emergency. Are things in worse shape than the GDP numbers would have you believe?
Do low rates even matter?
Treasuries and mortgage rates used to move in a much greater lockstep relationship — when Treasuries fell, rates did too (and vice versa). While they still have some influence over one another, their current relationship would hardly be considered lockstep.
-Be sure to read our article “What moves mortgage rates?“-
I would be remiss if I didn’t ask, “What’s the point of even lower rates?” To what extent do lower rates matter to consumers right now? All those who don’t qualify for today’s low rates won’t qualify for even lower rates either. But again, it seems like yesterday’s announcement has a lot more to do with the economy in general than just mortgage rates.
Wait and see
The truth is, this latest move by the Fed is an untested one with unknowable outcomes. They are going to start their Treasury purchases right away, so we should have some idea of the move’s influence sooner rather than later, but what will “later” bring?