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May 6th, 2011

At QE2’s end, will mortgage rates decline even more?

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DeadlineAs they have likely planned all along, the Fed has decided to let its program of purchasing $600 billion of Treasuries run its course. Quantitative Easing II, or QE2 as the program was dubbed, will come to a close sometime by the end of June. To the extent that economic activity was boosted by the program, we could very well see a falloff in growth of a like amount. The markets’ discounting of this future growth may be at the heart of the recent decline in mortgage rates and market interest rates.

The popular belief is that the Federal Reserve started their program to spur economic growth. However, we have been of the mind since late last year that QE2 was more intended to act as a sponge, keeping interest rates from rising too much, rather than trying to influence them downward.

Inflation to ward off deflation

Fed programs to spur the economy may also have been structured to ward off a potentially-devastating bout of deflation by engineering a little bit of inflation. If this was the plan, all evidence seen today suggests that it has worked, as stock markets, commodities, metals and food costs have all risen notably (and no one seems very concerned about deflation any longer).

As concerns about inflation rise, and prospects for continued economic growth become evident, interest rates naturally begin to rise. As economic growth got a stronger foothold late last year and early this year (and especially as inflation pressures began to form), the Fed has largely used its purchasing power as a tempering tool to keep interest rates from skyrocketing.

For example, Conforming 30-year fixed mortgage rates rose from about 4.3 percent in October to about 5.1 percent by the end of 2010 (and may have been even higher). Of course, they have since settled back somewhat as the markets have become more accustomed to an environment of firming, rather than falling, inflation.

For a time, perhaps too long a time, investors were eschewing almost all investments but ultra-safe Treasuries, with other markets going wanting for cash. Among the Fed’s goals no doubt was to de-concentrate these assets from safe-haven holdings so that they could and would be put to more productive use elsewhere. To some extent, this has worked: stock markets are producing solid gains as money flows into them, businesses are starting to re-invest and so forth.

Whether the inflation the Fed has helped to create will become a serious problem, or whether the kind of inflation we have in everyday staples will chill economic growth, is still unclear. However, to the extent that the Fed’s move propped up or added to GDP growth should be equal to the amount of pullback to be expected when the program comes to a close in June. If we are still experiencing the economic drag of higher food, oil and gasoline prices, growth may slow somewhat more, as well.

Mortgage rates to decline even more?

Should this turn out to be the case, and despite what may be inflation signals flashing yellow, it is very possible that mortgage rates will find more reasons to decline than to increase, much as they have found reasons to decline in recent weeks as the economic news has turned more gray than rosy.

That’s still a bit off in the future, and of course, economic growth may turn higher between now and then. Lower mortgage rates, should them come, would provide some additional chances to refinance, and the moribund housing market would benefit from improved affordability, as well.

To stay on top of the market as QE2 comes to a close, you should be reading HSH’s weekly Market Trends Newsletter.

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One Response to “At QE2’s end, will mortgage rates decline even more?”

  1. Mortgage rates and auto insurance…there’s a connection? | Auto Insurance Says: May 7th, 2011 at 9:23 am

    [...] « At QE2’s end, will debt rates decrease even more? [...]

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About the HSH Blog

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

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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