Dennis' Mortgage Blog

Today the Federal Reserve released the minutes from their Open Market Policy Meeting held April 26-27.  The purpose of the meeting is to discuss the Fed's policies and actions. 

Currently the Fed has an unchanged policy in regards to interest rates, the Fed has held the rate it charges banks for overnight loans at 0% - 0.25% for almost two years.  Any discussion about interest rates will be when the Fed should begin to increase rates since they cannot go any lower.  Part of the interest rate discussion is also the Fed's participation in markets as a buyer or seller of assets.  Currently the Fed is about a month away from ending its QE2 action plan of buying about $600 billion of U.S. Treasury debt (I explained QE2 in this post in November).  The purpose of the program was to keep rates low to encourage economic growth and expansion.  About the only thing that has resulted from QE2 is the stock market has climbed over 10% with the Dow climbing from around 11,200 to around 12,600 (and almost reaching 13,000 two weeks ago).  Some will argue that interest rates have benefited from the Fed's massive asset purchases, to some degree that is true but mortgages are probably 0.5% lower at best due to the program.

In addition to the $600 billion in Treasury purchases the Fed has been recirculating revenue from its Mortgage Backed Securities portfolio from payoffs and refinances back into the mortgage market adding another $300 billion to the economy.  Add QE2 to the approximately $1.7 trillion in QE1 and the Fed has purchased almost $3 trillion in debt from the U.S. Treasury and homeowners.  Almost all of it with printed money.

So the questions are whether there will be a QE3, when with the Fed begin to sell off its assets of more the $2.7 trillion and when will it raise the Fed funds rate and set off increases in other rates across the economy? 

The answers to these questions have caused some debate within the Fed's Board of Governors.  That there is dissension within the Fed, and growing with more members beginning to argue for rates to be pushed up sooner rather than later, indicates that Chairman Ben Bernanke's policies are meeting internal resistance.  With a "we'll see" formal position on whether we will have QE3 in the future, investors are piqued at the more vocal arguments in favor of "no we will not" from dissident Fed members.

If there is a QE3 rates may jump on the announcement as it would force another trillion dollars into an economy stuffed with cash that is sitting in companies balance sheets as cash or being used to inflate stock prices but not being used for capital investment, hiring of personnel and economic expansion.  If there is no QE3 but an aggressive move by the Fed to sell its Treasury and mortgage assets rates will climb as oversupply created by the Fed's sale will require higher yields to entice buyers. 

Bernanke indicates the Fed is waiting to see constant and steady growth in economic growth that indicates a sustainable recovery is under way, something the $3 trillion he has printed and the $3-4 trillion in deficit spending by the government in the past two years have not been able to produce.  Until Bernanke, and a majority of Fed governors with votes on monetary policy, feel such economic growth is underway then there will be no move on rates increasing and some likelihood the Fed may roll out QE3.

But as the minutes released today show, Bernanke's majority is teetering and he may not have the votes to implement his next big policy move.

Rates are moving up today having lost gains made since last Thursday.  Did we see a 'mini-bottom' yesterday or is this a temporary blip of profit taking in Mortgage Backed Securities?  Are you a risk taker? Then it is a blip.  Risk averse? Rates could be headed higher so take advantage now and lock in. 

Mortgage rates continue to remain low for the time being.  Call or email Dennis today to determine your purchasing power for a new home loan or monthly savings from a refinance.  Direct dial 562-472-1118