Fed Statement and Policy Decision: We Will Cram Money Down this Thing Until it Bleeds

by Alex Stenback on January 28, 2009

Here’s the short version of today’s policy statement:

The Fed has painted a very bleak picture of the economy, and though there is an outside chance that things improve later this year, things may well get uglier.  They’ll pull out all the stops to make it better etc. etc. etc.

· Read the full policy statement here [federalreserve.gov]

This part, from the statement, is especially pertinent, for the mortgage and real estate market:

“The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant.”

To this point, the Fed has earmarked a total of $500 Billion (only a fraction of which has actually been put to use) to the cause celebre of driving mortgage rates lower.  This reads to me like they will expand this program, and continue it idefinitely should the real estate market further deteriorate or rates start leaking higher.

If true, that qualifies as good news from a “mortgage rates should stay low or move lower” perspective.  However.  Lending standards continue to contract at a ferocious pace.  So efforts to force rates lower nothwithstanding, there will be many who will not be able to take advantage of low and lower rates, wherever they settle out. 

In other words, if you are at all marginal in terms of your credit, employment, income, or equity/cash position, and are planning to buy or refinance a home, you do this now. You do not wait.

Rates could go to zero, and real estate values could fall another 20%, but if you don’t have a job or equity when they hit bottom (many won’t) it won’t matter.

As for the immediate impact on mortgage rates, the stock market is rallying, which is sucking some money away from mortgages, so rates have actually ticked higher since the announcement.  I think we’ll find that may be a short-lived phenomena, but who knows.

Oh yeah, the Fed did not move the Fed funds rate from it’s 0-1/4% target. 

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