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Fed Sees Economic Contraction Slowing: Will Mortgage Rates Climb?



April 29, 2009 – Comments (1)

As I have mentioned numerous times before, the Policy Statement released by the FOMC at the time of announcing their decision on the Feds Fund Rate is the more important factor in determining which direction mortgage rates will move in the future.  I had expected a big shock to the markets, possibly even an increase in their MBS purchasing agenda yet again.  This time there was no “surprise”, rather a renewed commitment to the $1.25 trillion MBS purchasing spree, along with  the renewed commitment to use ALL available tools, including those not yet created I am sure, to open the floodgates of credit. 

Let’s break it down…

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower (no surprise hear as that is what the data has been indicating for a while now). Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit (the latter being the real problem since credit is what drove the economy before and is seen as the salvation of the economy). Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing (it’s called survival tactics). Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time (the pool water needs to be tested again before jumping in). Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability (Was it really their actions that are helping the economic recovery?  Is the economy really recovering or will it follow the path of the Great Depression and crash again in 2011?).

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued (While there is slack, it is interesting to note that our government has gone way beyond others in handling the situation.  This overreaction is likely to create high inflation rates, even hyper-inflation, so once it becomes un-“subdued”, watch out). Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term (Interesting outlook, the question being how much time and can the Fed react appropriately and timely enough to prevent excessive inflation, something I highly doubt).

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability (and will likely create even more). The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period (Well, they can’t go any lower unless they pay people to borrow). As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn (actually shortened the time of purchasing, but essentially both recommitments to artificially propping the markets – can you say “bubble”?). The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets (expect purchasing to be aggressive when it appears rates will increase dramatically, such as today). The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs (they feel without the credit floodgates opened, our economy will not recover). The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments (if they don’t like the way the balance sheet looks, they will just print more money).

Well, it looks like the Fed has everything under control still, right?  After all, they recommitted themselves to printing as much money as necessary and artificially manipulating the markets, not to mention using everything they can possibly think of to get credit flowing.  I am sure they will be able to just “soak up” all that money supply once inflation really starts going.  Yeah, right.

1 Comments – Post Your Own

#1) On April 29, 2009 at 3:53 PM, hondo928 (97.41) wrote:

Yea the will climb ala the Fisher Equation. and when inflation is 15% with that moron in office have fun paying 20% on your mortgage.  an 60% on your Visa

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