Mortgage Rates Respond to Fed, September 22, 2010

The Federal Reserve's statement yesterday that it is willing to consider additional purchases of US Treasury debt is the dominant driver of market activity today.  This practice is known as quantitative easing and should drive mortgage rates lower.

Mortgage Rate Trend Direction:    Down

Economic Reports/Rate Impact:   No Economic Reports Released Today

Key News:                                          International Reaction to Fed Statement, Obama Economic Team Changes

Summary

When I predicted three weeks ago that we had seen the lowest rates come and go, I gave myself some "outs".  One of the primary "outs" was additional quantitative easing (QE) by the Federal Reserve.  While, no QE has taken place as of yet, the statement released yesterday by the Fed gave a clear indication that such a move is likely.  When the Fed buys US Treasuries or mortgage-backed securities it results in lower interest rates. Hence mortgage rates are likely to drop today and over the next period as the QE plays out.

Impact of economic reports

No economic data will be released today.  Tomorrow will be a big day for data with jobless claims, existing home sales and leading economic indicators reports being released.

Impact of international or political events

Expectations among analysts are increasing that governments around the world may engage in their own QE efforts.  Reports show economic slowdowns in Europe and Asia.  Additionally, the US QE will drive the value of the US dollar lower, hurting exports from Europe and Asia and potentially triggering a response from governments in these areas.

Senior Obama economic advisor Larry Summers announced yesterday that he is leaving the administration at the end of the year.  He becomes the third key member of the Obama economic team to depart.  Do the wholesale changes represent a wholesale change in approach or simply a replacement of personalities?  The policies put forward in 2011 by this team will directly impact mortgage rates.  At some point, in the not to distant future, we have to come to terms with the impact of all the spending (including Quantitative Easing round 2!).  Rates will eventually go up---when the government intervention ends.