Wednesday, December 17, 2008

Interpreting What the Fed Said - December 16, 2008


The Federal Open Market Committee voted to lower the Fed Funds Rate by at least three-quarters percent today. The benchmark rate now rests in a range of 0.000-0.250 percent, the lowest Fed Funds Rate recorded levels in history.

And while the rate cut matters to Americans, it was more just a show of force.

The bigger news is that the Federal Reserve plans to "employ all available tools" to prevent the current recession from turning into a depression.

One such tool is to buy billions of dollars of mortgage-backed bonds. In November, when the Fed did this the last time, it started the Refi Boom we're in. No surprise, therefore, that mortgage markets rallied late in the day, leading conforming mortgage rates lower.

Jumbo, super-jumbo and FHA mortgage rates did not get similar treatment.

Also worth noting: In their statement, the FOMC's voting members fingered inflation as a diminishing economic threat. In the short-term, this is probably true. In the long-term, however, it's unclear.

What we learned today is that the Fed's "available tools" really does include the Kitchen Sink. A breadth of options like that should serve the economy well throughout the early part of 2009.

However, we can't forget that today's support for the housing market was 17 months in the making and the Fed may be trying to unwind it in 2.

Reviewing the massive stimulus since October, there's now a strong possibility that once the economy starts to recover, it will recover right into runaway inflation.

That in all probability is what's ahead for the U.S. and inflation is awful for mortgage rates.

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