The Fed today announced several moves that will impact mortgage and savings rates. The positive news is that the programs may result in lower mortgage rates. Unfortunately, savers will continue to suffer an environment of historically low savings rates.
One key piece of the Fed’s plan is to purchase $40 billion extra in mortgage backed securities with the goal of driving down mortgage rates. It will also continue to reinvest the principal payments it receives from its existing portfolio of MBS. Together, these activities will result in $85 billion in additional monthly MBS purchases.
Will these activities drive interest rates down further? Jimmy O’ Malley, a senior loan officer at Leader Bank doesn’t think so. According to him, increases in fees from Fannie Mae and Freddie Mac will eat up any reduction engineered by the Fed, resulting in stable rates. He doesn’t expect rates to rise or fall much in the next six months. “Now is still a great time to refinance or purchase a house,” he said, “even if rates don’t drop further. Rates remain near record lows.”
In addition, the Fed’s purchases of MBS were already widely anticipated by the market, and much of the impact may already be included in current mortgage rates.
Impact of Fed Decision on Savings Rates
The Fed statement also said that it will “keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” This increases the period of exceptionally low rates by one year, from mid-2014 discusses in previous statements. For savers this means that the historically low rates on savings and CD rates will continue for the foreseeable future.
Savers can make the best of a bad situation by shopping around and finding banks that are growing and are hungry for consumer deposits. Banks that need consumer deposit funds will pay more.
Impact of Fed Moves on Economy
Beyond the impact on savings and mortgage rates, will the stimulus, dubbed QE 3, help the economy? The best analogy I heard was from an analyst on CNBC (I can’t remember his name). He said the Fed can rev the engine with these policies, but the transmission can’t engage. Because of that, a revving engine will not result in faster economic growth.