Mortgage Interest Rates and the Fed will be on the top of minds this week for folks who are “floating” a refinance! This week the Federal Open Market Committee’s last scheduled meeting of the year starts today, and will end at 12:30 pm EST on Wednesday. At the end of the two day meeting the Fed will mark a significant signal of what could happen in 2013 for mortgage interest rates.
Around this time last year – the Fed started a program that essentially allowed them to purchase long term Mortgage Backed Securities, and then sell short term bonds – essentially leaving their balance sheet “even.” The program, called Operation Twist, is expiring, and the Fed (FOMC) must decide what it wants to do going forward.
Speculation on FOMC Moves Q4 2012Once choice, now that it’s committed to QE3, is to continue with the Operation Twist buy long / sell short program. Wall Street economists, however expect the Fed to fill the hole left by the expiration of Operation Twist by continuing to purchase long term rates of around $45Billion a month – without the sell off of Short Term Bonds. They are calling such a move (which expands the Fed Balance Sheet by, well, $45Billion a month) QE4.
Anything less than $45 billion in Treasury purchases from the Fed, most economists say, would not be enough to support the current mortgage bond market.
Societe Generale economist Aneta Markowska notes St. Louis Fed president James Bullard’s remarks last week that the Fed could scale purchases back to $25 billion a month. However, she thinks this is unlikely because “the market is already priced for something closer to $40bn, hence any reduction in the pace of buying would induce a backup in bond yields, and in effect, be a and hence constitute a de facto tightening.”
Many Economist expect the Fed to Announce that it will be concentrating it’s focus on a shorter term maturity Bond, probably the 5 year. This might mean that a program “similar” to Operation Twist would go forward, but with shorter term bonds in the mix.
In addition to some news about the “future” of the Fed Balance Sheet, and Operation Twist, the Fed could announce that it will be targeting “thresholds” for the Feds Fund Rate based on inflation and unemployment, and remove the forward guidance sentence from the statement… although we think this a change that is more likely seen in 2013, because…
The Fiscal Cliff Still Looms…
Unfortunately, there’s probably not much the Fed can do, now, to either Avoid a Fiscal Cliff, or insure a “safe landing” if Congress decides to send us over it.
Whether QE4 would be enough to offset the negative economic effects of going over the fiscal cliff or not is an open question, but one area where it would make a big difference is in the Treasury market, because going over the fiscal cliff would entail a sharp drop-off in long-term debt issuance from the U.S. Treasury. R. DiClemente, Citi
Weather the combination of expanding the purchasing of long term debt – and The Fiscal Cliff, would cause mortgage rates to NOSE DIVE towards the 1% rate – or move us to Mortgage rates of 10% is in great debate! Many Economist I read feel that that he Combination of going OVER the Cliff, and a QE4 would cause SHORT TERM knee jerk reactions that cause mortgage rates to nosedive – and then a LONG TERM situation where rates go through the ROOF.
Crystal Ball, where are you when I need you??? Our advice? Don’t gamble.
FHA already said they are going to raise the FHA PMI rates next year. USDA Home Loans could lose major areas that are available for the program, with USDA Map changes … if you are considering a refinance OR a home purchase, we suggest taking advantage of the CURRENT low rates.
Stay tuned! No matter what happens – no matter what rates are – WE have some of the BEST Mortgage Interest Rates Today! 
It’s going to be interesting for those of us who are Economic Junkies over the next few weeks! Have Questions? Call Steve and Eleanor Thorne 919 649 5058 Connect with us on Google Plus or Facebook!
I try and answer all questions :)