Fed’s QE3 instantly lowers mortgage ratesby Tim Manni
We speculated at the end of last week that the August employment report would be a deciding factor in whether or not the Fed would decide to react following their two-day meeting which concluded on Thursday.
From our weekly Market Trends newsletter:
So, will the Fed hold their fire? Odds are probably 50-50 at the moment; a stronger employment report on Friday might have made that perhaps 60-40 in favor of holding steady.
A huge change in policy might signal that the Fed is gravely concerned about prospects for the economy in the near future, and that might have unintended consequences, even causing a stock market selloff.
So what happened?
The Federal Reserve came right out and said the dismal economy, specifically continued high levels of unemployment, prompted an aggressive plan to buy $40 billion in mortgage-backed securities each month until employment improves. The plan, dubbed “QE3,” is the third installment in the Fed’s asset-purchase efforts to push long-term interest rates lower.
The result? Mortgage rates dipped almost instantly and the stock market rose to levels unseen since 2007.
“Consumers should see about a quarter percent dip in mortgage rates,” says Keith Gumbinger, vice president of HSH.com.
This time it’s different
While the Fed’s QE and QE2 both had definitive end dates, QE3 does not. “The Fed will keep buying mortgage bonds until it doesn’t feel as if it needs to,” wrote Karen Lawson.
You could argue, of all the stimulus this country has seen in recent years, of all the moves the Fed has made during that same time period, low interest rates have been what has worked. One of the hardest things about stimulus is making sure the relief makes it to the street level. The Fed has been able to lower mortgage rates and influence home prices higher. Furthermore, the Fed’s move was one the market understands well. The Fed’s decision wasn’t unexpected, in fact, the Wall Street Journal wrote that Fed Chairman Bernanke “devoted weeks to laying the groundwork for the new program by signaling its arrival and explaining why he wanted to launch it.”
When does it end?
When is enough, enough? When can we expect QE3 to sunset? What troubles me somewhat is that the Fed has set no benchmarks as to when “enough” people have refinanced or when the job market has improved to an acceptable degree.
Not only may QE3 be with us for some time, it could also prompt legislative action on additional programs.
Given the renewed downward pressure on rates, it’s not far off to believe that HARP 3.0 could be just around the corner. If one of the Fed’s only moves is to ensure lower interest rates, it makes sense to have the most streamlined, inexpensive refinancing program in place to ride shotgun.