The Fed – What They Watch – and What It Means for Mortgage Rates
by Tom on November 7, 2009
in Market Musings, Mortgage Rates, banks
An interesting analysis of the Fed, what they are watching and what it means for rates. Here’s the “plain and simple” version of what it says:
- The Fed is concerned about inflation and only inflation.
- The employment and capacity utilization is currently so low that the economy will have to really “heat up” before inflation would become an issue.
- The “fact” that the Fed is ignoring other issues and focusing only on inflation means that short term rates will stay low for a substantial length of time. The writer estimates until at least 2011.
- However, the fact that those issues are ignored means that we’re going to be looking at higher long term rates.
So, let’s summarize – if this scenario is true, we’re looking at a market situation where short term rates stay low and long term rates go up.
Going to be interesting.
What do you think?
Tom Vanderwell
Accrued Interest: Fed Rate Hikes: Your employment statistics. You will not need them.
The bold section is new, and if taken at face value, it tells you exactly what the Fed considers the sign posts for higher rates. Inflation. Nothing else.……For what its worth, I think the Fed considers bringing down their balance sheet as a bigger priority than altering rates. This is my impression from taking the mosaic of Fed interviews and speeches I’ve heard in the last couple months. That view reiterates the idea that short-term rates remain low for a long time, but it brings into question what happens to other assets, especially long-term Treasuries. The Fed bought 23.5% of Treasuries issued in 2009. In 2010, it is projected that the budget deficit will ease somewhat, but it will still be sharply negative. I think Treasury issuance rises. So with out the Fed buying, don’t intermediate-term rates almost have to rise?
