FOMC Statement - Winding Down Mortgage Purchase Program

The Federal Reserve released its Federal Open Market Committee statement today and the most noticeable aspect was confirmation that it is winding down its purchase of mortgage backed securities.

The statement says:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. "

The risks of ending this program are pointed out in this article, and include higher mortgage rates. Indeed, our projections show that mortgage rates may rise between 50 to 100 basis points once the Fed stops buying mortgage backed securities. Average national mortgage rates are at 5%, and have actually fallen over the past three weeks.

The Fed also confirmed that it will keep the Fed Funds rate low for the foreseeable future.

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

This news does not change our forecast of rising mortgage rates and flat deposit rates for the next 6 - 12 months.

You can read the full Fed statement here.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

Comments

  • Sam Cass

    January 28, 2010

    Yes, good point. But the bias seems to be on removing support. Based on the statement we should expect to see rates rise over the next month or so. Actually I'm a bit suprised rates haven't risen more already.

  • Brian Chance

    January 28, 2010

    The Fed leaves the door open to continue it's QE program, " The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. "
    Mortgage rates will go up 50 to 100 basis points in short order if the Fed completly pulls out of the mortgage market.

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