In the second week of December, the Federal Reserve (Fed) reiterated that their Mortgage Backed Security purchase program will end on March 31, 2010. This program helped keep home loan rates low in 2009.
History has shown that when the Fed keeps rates too low for an extended period of time, this usually leads to higher inflation. If the accommodation is removed too early, it can derail an already fragile recovery. The Fed continues to walk this fine line, trying to get it just right.
Why is this Fed decision significant? Let’s look at a few numbers to get an idea. The Fed will purchase an average of $11.5 billion of securities each week through the end of the buying program. This is less than half of what the Fed was buying regularly throughout 2009 and a third less than the Fed has been buying in recent weeks.
It’s a matter of simple economics. When there is abundant supply and diminishing demand, the price of an item (in this case, it’s Mortgage Backed Securities) will subsequently go down. When Bond prices start to decrease from the Fed’s diminished demand, home loan rates will likely rise.
Contributed by Michael Zimmerman
Direct: 808-457-9683
Michael@Michael-Zimmerman.com
www.Michael-Zimmerman.com
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