December 22nd, 2009 9:53 AM by Richard T. Cirelli
How The Fed's Official Statement Yesterday Could Move Mortgage Rates In April By 1 Percent Or More
The Federal Open market Committee (The Fed) met yesterday for one of their regularly scheduled meetings to set monetary policy. Their statement at the end of the meeting had little news in it. I suppose no news is good news as it was more of what the Fed has been saying for weeks --- 'the economy is slowly improving, the housing sector a little better and labor markets weak. Small businesses are still not hiring, the inventory levels are returning to normal matching demand"..
The Fed does not set mortgage rates but their policy and their statements have a lot to do with mortgage rates. That's because the Government owns Fannie Mae and Freddie Mac and the Government has been the major buyer of Mortgage-Backed Securities (MBS) issued by Fannie Mae and Freddie Mac for the past year. These MBS are then sold to investors and they trade every day just like stocks and bonds are traded. It's not the banks and the mortgage bankers that set mortgage rates - it's the supply and demand for MBS's that all mortgage lenders sell their loans into that dictates the rate or cost of a mortgage.
The Fed reiterated that it will end its purchases of MBS's at the end of Q1 due to the improvement in the financial markets. The Fed believes there is little to fear on the inflation front. The statement further said the Fed would leave the Fed Feds rate at zero to +0.25% for that "extended period of time".