Fed efforts mean low mortgage rates for a long timeby Tim Manni
On Monday, we published our annual set of predictions for real estate and mortgage markets for the upcoming new year. Number nine on our list of “10 thoughts for 2013” was “Fed policy: Operation Twist ends, something new starts.”
That prediction came early. At the conclusion of the last Federal Open Market Committee (FOMC) meeting in 2012, the Fed did in fact announce that Operation Twist will sunset at the end of the month as originally planned, and the policy-setting group also announced a new effort to keep mortgage rates low and improve the economy as a whole.
We think the Fed’s present program of selling its short-term Treasury holdings in favor of buying long-term ones, called “Operation Twist,” will come to an end as scheduled at the end of 2012, as the Fed has nearly exhausted its short-term holdings at this point.
However, we believe that the central bank will take a page from its own playbook, replacing Operation Twist with a commitment to buy new Treasury debt for an open-ended period and in an amount “up to” something approximating the size of Operation Twist, worth about $40 billion per month in 2012. In this way, the Fed can help keep long-term interest rates low, which in turn helps keep mortgage rates low and stimulates the housing market, if not the economy in total.
Not a bad prediction.
From the press release following the FOMC meeting:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
While the Fed language can be rather technical, here are two main components to focus on to determine how the Fed’s recent actions will influence mortgage rates:
- The Fed will continue their bond-purchasing program dubbed QE3. The continuation of QE3 means the Fed’s bond purchases will pressure long-term rates (including mortgage rates) lower, and will stimulate both housing and the economy as a whole, explained loan office Dan Green on his blog today.
- The Fed is replacing the Operation Twist program, which was essentially a money-recycling program, with an effort that will exclusively purchase Treasuries. The out-right purchase of Treasuries will also serve to keep mortgage rates low.
Finally, an important item to understand: The Fed has removed hard dates concerning the expiration of their programs designed to keep rates low. Instead, the Fed has replaced end dates with market-based guidelines.
The Fed is looking for a very specific set of conditions to occur before they make any changes, explains Gumbinger. “It’s a more balanced approach, and allows them to tweak policy instead of ending or beginning anything at a specific time.” It also means the Fed has the ability to run these programs indefinitely.