Boston Federal Reserve President Speaks in Support of Quantitative Easing
Eric Rosengren clarifies objectives of LSAP; Meets Fed Mandates; Effects already seen in economy
Eric Rosengren, president of the Federal Reserve Bank of Boston addressed the Greater Providence Chamber of Commerce regarding the Fed’s recently initiated Large-Scale Asset Purchase program. Also know as Quantitative Easing, or “QEII”, this program was widely rumored since August, was announced November 3rd, and went into effect last Friday, November 12th. I personally attended the presentation.
Since its announcement, the 10-year Treasury yield, a benchmark for long-term interest rates has risen in yield 4/10ths%.
Rosengren cited the Fed’s dual mandate: maintain low inflation, while accommodating the lowest possible unemployment rate. He explained that, unlike in other cases, current economic conditions allow the Fed to address both issues at the same time. The LSAP is expected to achieve both. In fact, since it first hit the rumor mills after Fed Chairman Benjamin Bernanke’s speech at the Jackson Hole Economic Conference in August, the program has achieved its goals.
Just as a Fed interest rate decrease would be expected to lower long-term rates, boost stock values, and cause the dollar to weaken against other currencies, so too was the LSAP expected to cause the same results. The only difference is the vehicle of that change: in a rate change to the Fed Funds Rate, the Fed buys or sells short-term Treasury bills; in LSAP, the Fed is buying longer-term Treasury notes and bonds.
Since rumor of the programstarted circulating in August, and up until its effects were seen last Friday, mortgage rates declined by about, 0.25%, the Dow Jones Industrial Average rose more than 12%, and the dollar depreciated against other major currencies. The program’s announcement also led expectations of long-term inflation to increase from a level around 1.4% to 2.1% in that time frame, according to Rosengren.
So here’s the bottom line for home buyers and mortgage originators:
We’ve seen about the best we’re going to get out of this program. From here out, the effects will be measured in smaller adjustments to rates. The effects seen last Friday and this Monday are reflective of a common Wall Street phenomenon: buy the rumor, sell the news. That is to say, markets will react to coming events in advance of their occurrence to the poitn where the will often overreact. Then, when the news is proved true, the review their position, find they went too far and react to it.
Mortgage pricing is still worse than it was last Wednesday, the final day of truly good pricing. It’s improved a little in the last two days, in a possible reaction to an overreaction. While the time may come in the next few weeks where pricing stabilizes and it becomes safe to float loans, albeit at a higher rate than 2 weeks ago, at the moment it is still important to lock new loans going into process until that stability comes.
Tomorrow brings weekly jobless claims data, the single best chance out there of seeing a reversal in mortgage pricing. If claims exceed 450,000, mortgage pricing should get better. That said, Eric Rosengren cited the LSAP program with the ability to add 700,000 jobs to the economy and shave 0.5% off of the unemployment rate. Even if claims rise this week, we can’t bet on that going forward. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great day!
Related articles:
Weekly Recap for November 8th-12th
Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.
November 17, 2010 by Dan Hartman · 2 Comments
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I have worked as a residential mortgage advisor since February of 2000 and a part of the founding team here at Province Mortgage. We believe that by doing right by a family today, we can create a relationship for life, and, hopefully, and ambassador who will share the experience with others. It is our team of professionals that helps us to create this experience.
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[...] the current Quantitative Easing program. Numerous Fed officials, including Chairman Bernanke, and Boston Fed President Eric Rosengren here in Providence, spoke supporting the program, indicating that it has already had many of the desired effects. [...]
[...] on the other hand, isn’t so sure, and is continuing its $600 billion asset-purchase program, intended to provide some stimulus to the economy, but, more importantly, to keep inflation [...]