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JPMorgan Chase & Co
BNP Paribas SA
The Federal Reserve is doing everything in its power to get you to buy a house. On Thursday the Fed’s rate-setting committee said it will start buying $40 billion of mortgage-backed bonds every month from now until—well, it didn’t say when. Buying those bonds should translate into lower mortgage interest rates, speeding up the tentative recovery of the housing market. The Fed is betting that a stronger housing market will help lift the overall economy, which remains stuck in low gear more than three years past the end of the 2007-09 recession.
The Fed’s announcement—immediately dubbed QE3 by the markets, for round three of quantitative easing, or buying bonds to drive down long-term interest rates—had an electric effect on the mortgage market. Investors clamored for mortgage bonds, bidding up their price and thus pushing down their yields. The yield—that is, the effective rate that new investors receive—fell to just 1.01 percentage points above the yield on Treasuries. That was the narrowest spread in almost 15 years, signaling that investors are demanding only a small premium to own mortgage bonds instead of Treasuries. (Technically, that 1.01 is the difference between the yields on a Bloomberg index of Fannie Mae-guaranteed mortgage bonds and the average of 5- and 10-year Treasury notes.)
Mortgage rates are already at historic lows. The average rate on a 30-year fixed-rate mortgage in August was 3.6 percent, says Freddie Mac, down from 6.1 percent at the start of the recession in December 2007.
“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,” the Federal Open Market Committee said in a statement at the end of its two-day meeting in Washington. At a press conference after the statement was released, Fed Chairman Ben Bernanke said that while the U.S. has “enjoyed broad price stability” since the mid-1990s, the employment situation remains a “grave concern.” He added: “The weak job market should concern every American.”
The rate setters said they expect the federal funds rate will stay at “exceptionally low levels” at least through mid-2015—vs. a previous expectation of late 2014.
The Fed also released new forecasts in which FOMC participants upgraded their estimate for 2013 economic growth to a range of 2.5 percent to 3 percent, vs. a forecast in June of 2.2 percent to 2.8 percent. They predicted that unemployment in the final three months of this year will average 7.6 percent to 7.9 percent, in line with the June forecast of 7.5 percent to 8 percent.
Since the financial crisis began, the Fed has bought more than $2 trillion worth of Treasury bonds and mortgage-backed securities. Lately it had focused its efforts on Treasuries. Its holdings of mortgage-backed securities peaked at around $1.1 trillion in 2010 and has lately been a little more than $800 billion. The purchase of $40 billion a month, in addition to the continuing reinvestment of the proceeds from maturing securities, will quickly swell that amount.
Economists called the Fed’s move dramatic. Michael Feroli, chief U.S. economist of JPMorgan Chase (JPM), told clients in a note that the Fed’s actions were “extremely aggressive.” Scott Anderson, senior vice president of Bank of the West (BNP), wrote, “The Federal Reserve went all in today.” Barclays (BCS) Research called it “a bold shift in Fed policy.”