The Federal Reserve doesn’t “do” deadlines, preferring to shape policy much like the Colorado River shaped the Grand Canyon – gradually, but inexorably, over time.
But signals from the Fed indicate that patience is wearing thin at the economic policy board, with some economists maintaining that the Fed must take the training wheels off and give the economy a chance to grow on its own. A big part of that strategy is encouraging private investors to jump back into the mortgage market – with or without a net from Uncle Sam.
It’s the latter point we’re interested in today. Recently, the Federal Reserve announced it will cease its mortgage security buyback program next March – a program that helped keep interest rates artificially low for much of 2009. That should change the rate picture by Spring 2010, most likely bringing interest rates upward.
It takes some tea-leaf reading, but that seems to be the consensus, based on the Fed’s own actions, directives and language used in recent public policy statements. For example, here are the minutes from last week’s Federal Reserve meeting, where the policy-making committee decided to keep the benchmark Federal Funds rate between 0% and .25% – for now – but phase out the mortgage security purchase program by Spring 2010.“To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.”