After its two meeting, the Federal Reserve announced yesterday that it will continue its stimulus program for the next few months, a move that surprised the financial markets and could have a real effect on long-term mortgage interest rates.
The Fed has been buying up $85 billion worth of Treasury bonds and mortgage-backed securities (MBS) each month in an effort to bolster economic growth and keep rates low. These purchases have been credited with pushing mortgage interest rates to rock-bottom levels, with the average rate on a 30-year conventional loan hitting a low of 3.31 percent during the week of Nov. 21.
Rates at and near record lows have eased the housing recovery as home sales have grown and refinancing has remained an attractive option. Yet for several months, Fed Chairman Ben Bernanke has hinted that the economy is healthy enough to reduce some of the stimulus. Those rumors alone were enough to send mortgage rates skyrocketing up to 4.57 percent as of last week, according to Freddie Mac.
But Bernanke and the Fed recalculated the economic pace, saying in a statement “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.” The statement added, “the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
Bernanke mentioned that unemployment, while officially falling down to 7.3 percent last month, was completely a reflection of Americans dropping out of the work force, not an indication of more job creation.
Most economists had predicted the Fed could cut its bond spending after this meeting by at least $6 billion. The shock of the Fed’s decision could send mortgage rates back down, although it is unlikely they will return to their former all-time lows.