R.E. Source
We’re being told that the Federal Reserve (and it’s infinite wisdom) is confident in the economy and is going to end a $600 billion program to support it. The next move might be to figure out how to stem the tide of inflation.
The Fed has been buying governement bonds to help keep interest rates low. Now that program will expire in the coming weeks.
Currently the Fed has kept the benchmark interest rate near zero, where its been since December 2008. Fed Chairman Bernanke predicts that the recent jump in oil and food prices will cause a brief and modest increase in consumer inflation. He also maintains that interest rates should stay low longer, and the bond buying program should run it’s course. That because the end has been telegraphed for some time, it will have littl eor no impact on the markets…it’s all priced in.
Many believe that the end to this program will mark a period of rising rates if the demand for Treasury bonds sees a decrease after the program ends. Higher borrowing costs would likely slow spending and investment and have a negative impact on the economy.
The Feds meeting ends today and Bernanke will have a press conference to make announcements. The Fed is expected to lower its forecast for economic growth slightly this year, bump up its inflation estimate and upgrade its outlook for jobs.
According to the AP wire news: In February 2010, Bernanke began laying out the Fed’s strategy for tightening credit. But the economy weakened in the spring and continued to struggle. Bernanke did an about-face, and the Fed announced the bond program during the summer. The program was necessary in part because the Fed’s key interest rate can’t be cut any more to prop up the economy. Economists predict the Fed at this week’s meeting will maintain a pledge to hold the rate where it is for an “extended period.” Dropping the pledge would be a signal that the Fed would soon be taking steps to tighten credit.
It seems ridiculous that anyone would lend money at a rate of 5% over 30 years. That’s a pretty low rate of return with some risk. Without some stringent guarantees, this would not occur. Look for rates to begin a modest ascent this year. The Austin market is healthy with 6 months available inventory on average, but rising interest rates would have an impact.
Upside: Low interest rates mean better affordability, increasing the pool of qualified buyers.
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Rates are extremely low currently and so far there is no economic pressure to cause them to increase. The toughest aspect of the mortgage business is the continued tightening of qualifications. This process tends to hurt the first time home buyer the hardest. This then causes a chain of events that ripple throughout the market. If the the lower priced houses don’t sell, it makes it more difficut for people to move up to higher priced homes. Currently Washington is talking about making the minimum down payment of 20%. I doubt that that would ever pass as that would kill the housing market, but we need to be vigilant. One of the best things for thr economy is a health housing market.
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