Will the Fed Act (again) to Force Mortgage Rates Lower?

by Alex Stenback on June 9, 2009

If you missed the blow out, fixed mortgage rates have rocketed higher by a point (give or take) in the last couple of weeks.  This despite more than a trillion dollars of federal money intended to keep mortgage rates low.

The trillion dollar question, at this stage, is whether the Fed will commit more dollars to bring rates back down.

To that end, PIMCO’s Mohamed El-Erian has some thoughts on the recent bond market sell-off, and where policy makers are likely to go from here.  A key passage from the article:

“Housing is still central to the stabilization and eventual recovery of the U.S. and global economies. Any further decline in house prices will erode the collateral many Americans borrowed against, dampen their already-fragile consumption appetite, and increase the headwinds facing a banking system that is finally regaining its footing. The U.S. can ill-afford a further sell-off in U.S. bonds at this stage in the economy’s rehabilitation process. Yet there is no easy way for policymakers to address this challenge.

As an illustration, consider the dilemma facing the Federal Reserve. Should the central bank step up its purchases of both Treasuries and mortgages in order to stabilize interest rates, but at the risk of adding to the distortions in these markets; or should it refrain from intervening further and risk a return of widespread economic and financial disruptions?

I suspect that, when push comes to shove, policymakers will opt for greater purchases of mortgages and Treasuries – not because they really want to, but because the alternative is viewed as worse.”

If you are rooting for lower rates, hope Mr. El-Erian’s viewpoint is shared by those at the Fed and elsewhere.

{ 2 comments… read them below or add one }

Aaron Dickinson - Edina Realty June 9, 2009 at 9:08 pm

Mark my words… 4.5% mortgages today will have many ill effects in the years to come. I don’t know that it is worth the cost.

Anonymous June 11, 2009 at 4:47 pm

Aaron, why do you think 4.5% rates will have ill effects? I think those 4.5% FHA assumable loans will make some homes very marketable when inflation hits!

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