Market Brief from First Capital
Fed Pulls Trigger, To Buy Mortgages in Effort to Lower Rates
The Federal Reserve fulfilled expectations of more stimulus for the faltering economy, taking aim now at driving down mortgage rates until an improvement in unemployment that the central bank says will be a problem for several years.
The Fed said it will buy $40 billion of mortgage-backed securities per month in an attempt to foster a nascent recovery in the real estate market.
The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve.
There’s strong hints that they’ll do Treasuries next,” Joe LaVorgna, chief economist at Deutsche Bank Advisors, said in a phone interview from London. “They’re pulling out all the stops to try to get this economy to gain some traction and, most important, to get unemployment down.”
“The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Open Market Committee said in a statement.
As a follow-up to the statement, the Fed released its latest economic projections, which foresee slow growth including a jobless rate that stays above 7 percent into 2014. The economic projections expect growth to remain slow but to improve due to the stimulate measures announced Thursday.
In addition, the Fed said it will continue its program of selling shorter-dated government debt and buying longer-term securities, a mechanism known as Operation Twist. It also will continue its policy of reinvesting principal payments from agency debt and mortgage-backed securities back into mortgages.
The Fed left its funds rate unchanged at near-zero but offered one change in that regard, saying the rate would stay at “exceptionally low levels” until at least mid-2015.
LAST WEEK: Stocks rose Friday, energized for a second day by the Federal Reserve’s promise to take new steps to try to heal the economy.
WHAT”S AHEAD: This week brings us the release of only three monthly economic reports that have the potential to influence mortgage rates. None of them are considered to be highly important, so look for the stock markets to be in the forefront of bond trading a good part of the week. I would not be surprised to see stocks pull back from current levels in the near future, probably leading to funds shifting back into bonds as a result. If that is the case and it happens this week, we should see mortgage rates move a little lower on the week despite the lack of any key economic releases.
Overall, there really isn’t a specific report or particular day that stands out as the most important of the week. I don’t believe any of this week’s economic data has the potential to move the markets or mortgage rates heavily. There are many individual speaking engagements by different Fed members, which can cause some fluctuations in the markets if anything unexpected is said. With those and the potential for sizable moves in stocks, we still may see some changes in rates several days this week.