Fed Moves to Keep Rates Low
Fed Moves to Keep Rates Low
The Federal Reserve announced Thursday that, in an effort to re-ignite economic recovery, it was taking aim at mortgage rates — a move that will likely take rates even lower from their current record lows.
The Federal Reserve announced it will purchase $40 billion of mortgage-backed securities that will help boost the recovery in the housing market. What’s more, the central bank said that it will continue with the purchase program until the economy shows greater improvement, particularly with unemployment.
"These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," according to the Fed in a public statement.
The Fed says the economy still has a long way to go toward recovery. The Fed predicts the jobless rate will stay above 7 percent well into 2014 and that economic growth will remain slow in the coming months.
At its Thursday meeting, the Fed left its funds rate unchanged at near-zero, but announced the rate — which has a bearing on mortgages — would remain at "exceptionally low levels" until at least mid-2015.
As mortgage rates sink lower, home shoppers have been taking advantage. The Mortgage Bankers Association announced this week that mortgage applications for home purchases were up 8.1 percent for the week ending Sept. 7. Mortgage applications for purchases also were up 7 percent from year-ago levels, MBA said.
"While low interest rates impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates promote," Fed Chairman Ben Bernanke said Thursday following the Fed committee’s meeting.
Source: “Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates,” CNBC (Sept. 13, 2012)
Editor's note: The Federal Reserve's decision to buy $40 billion a month in mortgage-backed securities isn’t expected to have a significant impact on housing, since it's no longer lower rates that stimulate home sales, says NAR Chief Economist Lawrence Yun. It’s even possible mortgage rates will rise, despite the Fed action, if private investors, fearful of inflation, sell mortgage-backed securities at a faster rate than the Fed is purchasing them. A game changer for housing would be something that moves the dial on lenders’ underwriting standards, from today’s overly stringent standards to standards that are closer to normal — that is, closer to the safe but reasonable underwriting standards that characterized lender practices prior to the housing boom.