Fed Surprises Markets - Impact on Savings and Mortgage Rates

Fed Surprises Markets - Impact on Savings and Mortgage Rates

The Federal Reserve announced today that it would continue to purchase $85 billion per month of mortgage and treasury bonds. Mortgage rates and CD rates had begun to rise in expectation of tapering and this move will act to depress rates for the next couple of months.

The Federal Reserve announced today that it would continue to purchase $85 billion per month of mortgage and treasury bonds. This surprised most Fed watchers as the conventional wisdom had been that the Fed would begin to taper their purchases. In fact, the recent spike in mortgage rates and gradual rise in CD rates have been largely based on the Fed making such a move. When markets are surprised, they react quickly, and that happened today.

The impact on mortgage rates was swift and significant. Rates on 30 year mortgages fell by a quarter of a percentage point during the day in response to the Fed news.  

It's still early to guage on the immediate impact on CD rates but I expect the increase in average rates we have seen over the past three months is largely over for the moment.

Where do we go from here?

What happens next to mortgage and deposit rates depends entirely on the economy. The Fed decided to continue its level of bond purchases because it believed the economy was not growing as fast as it had initally forecast.

The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.

The culprit - rising rates, engineered by expectations that the Fed was going to cut back. Talk about the cart leading the horse.

If economic news comes out stronger than expected than expectations will grow that the Fed will cut back at their net FOMC meeting and rates will begin to rise again. If the economy underperforms, then the market will expect the Fed to keep buying and mortgage rates will stabilize while CD rates remain flat or begin to fall again.

The bottom line though is that we have, for now, gone from a rising rate environment (as feeble as it the rise was) to a flat-rate environment. Plan accordingly.

Image: ddpavumba at FreeDigitalPhotos.net

Reviews

  • Sol

    September 19, 2013

    @Shorebreak

    To me the big issue is that the Fed has consistently missed the mark on how strong the economy is likely to be over the past five years. Their strategy must be to try and talk it up and then when the economy underperforms their projections, they fall back on QE 1,2, and 3. I no longer have any confidence in their projections and thus in the decisions they make based on these projections. I still don't think there will be any significant recovery that will really lift rates until 2017.

    It is an interesting point that an economy that is so weak it can't tolerate a 3% yield has a record high stock market. But I think corporate profits are booming and obviously all of the Fed liquidity has to go somewhere. The profits though are being stashed in the bank, thus the record high deposit levels, not deployed to hire more workers, invest, etc.

    Some of the money is also going to India, Turkey, and much of the developed world which has benefited from this massive liquidity bubble and were hurting when the Fed hinted rates would go up. This developing world bubble is just one potential danger of the prolonged Fed policy.

  • Shorebreak

    September 19, 2013

    Bernanke and the FOMC have lost all credibility. Next time, certainly not this year, that they hint at "tapering", no one will take them seriously. If this economy can't tolerate a 3% yield on the 10-year Treasury Note, then the S&P 500 Index should not be anywhere near North of 1700.

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