Fed Spends $750 billion to Lower Mortgage Rates
The Federal Open Market Committee (FOMC) informed the public this week that it will expand its dominating position in the mortgage-backed security (MBS) market, throwing an additional $750 billion there. Markets rallied on the news with Treasuries shedding up to 51 basis points.
Economists were up in arms about the Fed's measures. Stephen Stanley of RBS Greenwich Capital said via the WSJ blogs:
Bloomberg summed it up in the lead of their coverage:
By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis. San Diego real estate
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Fed cuts interest rates to almost zero
The Federal Reserve cut its target for the federal funds rate, which is what banks charge each other for overnight loans. This key short-term interest rate is now at a record low range of zero to 0.25%, from the previous 1%.
Ian Shepherdson, chief U.S. economist for High Frequency Economics said: "So here we are: Rock bottom. The Fed move is a reflection of an utterly desolate economic picture, which will persist for the foreseeable future as the wrenching adjustment in household finances continues."
The ultimate cost of the Fed rate cuts and bailout programs may be huge inflation a few years down the road. San Diego MLS
Mortgage Rates Moving Up
Fed Head … Finished Cutting Interest Rates?
Federal Reserve Chairman Ben Bernanke signaled he is finished cutting interest rates for now and has turned his attention to concerns about inflation in the world’s foreign exchange markets in the wake of the U.S. dollar’s 16 percent decline against the Euro over the past year. Speaking to the International Monetary Conference, Bernanke stated that, “For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.”
Bernanke called financial market conditions “strained” and reiterated that U.S. consumers face challenges from declining home prices and stricter mortgage and other lending standards, a weaker job market and higher energy costs. He added that economic growth will remain limited until home prices and the housing market show clearer signs of stabilization. San Diego California downtown real estate market
Not a recession?
The economy grew at a pace of just under 1.0% in the first quarter of this year. While this is not a cause for celebration, it is growth and the very definition of recession requires that the economy is contracting instead of expanding. Even consumer spending grew an anemic 0.2% last month. Therefore, regardless of the fact that Warren Buffet says that we are in a recession already, the statistics do not yet show this fact. What if we do not fall into a recession?
Well, a recession would mean that rates stay low and the Federal Reserve Board is focused on stimulating the economy. Low growth puts the Fed focus on inflation first as we have entered into a period of "stagflation." We have already seen rates rising to reflect this difference. While there may be only 1.0% difference in growth rates between one and the other, the economic remedies and market reaction can differ significantly. Since the housing sector is the weakest within the economy, this sector needs lower rates as part of the stimulus package.
On the other hand, don't get mesmerized by the numbers. Warren Buffet could very well be right. An important segment of growth in the first quarter was due to a lower trade gap and this was fueled by a lower level of imports. We import less when our consumption goes down. Even consumer spending did not grow when inflation was taken into account. So there is room for the economy to slide further and this may reduce upward pressure on rates. San Diego California Realtors