As expected, the Federal Reserve announced this afternoon that they are moving forward with their latest economic policy dubbed “Operation Twist,” which may lead to even lower mortgage rates.
What is Operation Twist?
HSH.com VP Keith Gumbinger provides us with a “friendlier” version of the June Fed minutes which begin to describe how it will begin to remove itself from the market and the impact it may have.
The minutes from the June Fed meeting were released yesterday, revealing a general format for how the Federal Reserve will end and exit all the extraordinary programs (”policy accommodation”) it employed to help push the economy out of the recession.
The Federal Open Market Committee (FOMC) ended their two-day meeting today the same way they have been for months now: keeping the target for the Fed funds rates between 0 and 0.25%, and claiming that the economy continues to recover, albeit very slowly:
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
For months now, the hype surrounding the conclusion of the Federal Open Market Committee’s (FOMC) two-day meetings has been far less about a possible change to the Federal funds rates, than it has been about the short statement that follows.
Today’s conclusion certainly continues that trend. While we weren’t expecting much of a change in the FOMC’s statement from their September release, we were in fact keeping our eyes peeled for any subtle changes to how the Fed addressed economic conditions. Their stance that the current climate is “likely to warrant exceptionally low levels of the federal funds rate for an extended period” remained unchanged, and the target for the Fed funds rate remains between 0 and 1/4 percent.
Minutes ago, the Federal Open Market Committee (FOMC) released a statement following their two-day meeting, which solidified most of, if not all, analysts’ expectations.
MBS/Debt Purchases Extended
Perhaps the biggest development was that the Fed announced that they will ease their purchases of mortgage-backed securities and agency debt by the end of the first quarter of 2010, not by year’s end as previously stated. Conforming rates should remain low for a while yet, but the Fed’s reduced demand might serve to nudge rates up. The decision to push their exit strategy back signals that private markets may not quite be ready to operate on their own by December.
The release following the conclusion the Fed’s Federal Open Market Committee (FOMC) meeting today revealed the Fed’s plans to begin winding down one of their many facilities (emphasis added):
…the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.
As expected, the Federal Open Market Committee (FOMC) announced that the target for the Federal funds rate will remain between 0-0.25% “for an extended period.” The FOMC also reiterated their commitment to spend up to $1.25 trillion on Fannie and Freddie mortgage-backed securities in order to keep conforming rates inside their current range.
Our “prediction” post this morning speculated on whether or not the FOMC would discuss a possible exit strategy. In exactly the same language as their release after the April meeting, today’s statement said, “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”
Borrowers, you may have noticed that the lower cost of credit engineered by the Federal Reserve is not necessarily being fully passed on to variable rate borrowers — including those with Home Equity Lines of Credit (HELOC). The reason has been a fairly new phenomenon known as interest rate floors.
“Just as ceilings create a top possible rate, floors are a bottom limit on how low the interest rate can go,” said HSH Vice President Keith Gumbinger. Not all lenders have adopted floors, and they typically don’t exist in older contracts (before 2003).
As expected, the Federal Open Market Committee (FOMC) concluded their two-day meeting yesterday by leaving the target range for the federal funds rate at zero to 0.25%.
Despite the expectations and strategies largely expected from the committee, there were a few aspects of the Fed’s initial press release following the meeting that stood out to me.
(1). The Fed plans to not only continue purchasing debt and mortgage-backed securities (MBS) from Fannie and Freddie, “it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.”
As expected, the Federal Reserve cut its key short-term rate yesterday; the Federal Funds rate is now a scant one-quarter of one percent. The Prime Rate is down to 3.25% — its lowest point since 1955.
What does it all mean? Our own Keith Gumbinger analyzes the move:
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.
