Fed’s exit strategy will affect Rates
Fed’s exit strategy to impact mortgage rates
Mortgage rates remained near historic lows for most of 2009. That was one of the Federal Reserve’s aims, a play to help the housing market stabilize. By keeping short-term interest rates near zero, longer-term rates remained low, as well. The Fed also kept the mortgage market directly stocked with cash, purchasing prodigious amounts, a total of $1.25 trillion, of Fannie Mae and Freddie Mac mortgage-backed securities.
This program will end after March. The Fed stepped in where private market investors were too fearful to tread and kept mortgage lending alive. There is guarded optimism that when the Fed completes its MBS purchase program, private investors will be ready to return to that market in greater volume and make up the difference. As the housing and financial markets continue to heal, the focus of the Fed will turn to how it will unwind its unprecedented steps to provide liquidity and backstop the financial system.
Most economists believe that will begin in 2010. Some say it already should have started. The danger in waiting too long is that inflation will get away from them. The danger in not waiting long enough is that higher rates will cause the economy’s rebound to fizzle. It’s a tricky call. For now, Fed Chairman is sticking with his “rates will remain low for an extended period” mantra.
If all goes well and the economy continues to improve, interest rates, including mortgage rates, will be going up. The Fed will either push rates up, or the financial markets, worried about inflation, will run ahead of the Fed and pull them higher. In December, the markets were betting that short-term rates would be 0.5 percent points higher in mid-2010 and a full percent higher by the end of the year. Most forecasters expect much of the increase to filter into mortgage rates, and so expect to see rates just under 6% by the end of next year. © 2010, Real Estate Information Services, Capitol Assets & Choice Finance®
Contributing writer & Maryland Loan Officer, Eric Strasser
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