Fed sends rates on accomodative path
2009/03/20, 4:52 pm
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Mortgage interest rates are likely to fall as a result of the Federal Reserve’s plan announced Wednesday to buy up $300 billion in Treasuries and increase purchases of mortgage-backed bonds, economists say.

The Fed’s program attempts to reduce the supply of outstanding mortgage bonds, boost the price of the remaining bonds and lower their yields. This allows banks to reduce rates for new mortgages and still make money.

Prior to this announcement the spread between 30-year fixed mortgages and 10-year Treasuries was 2.1 percent, higher than the average of 1.75 percentage points during the 10 years before the subprime mortgage collapse, according to Bloomberg’s calculations.

Putting people back to work is the next challenge facing the Obama administration. Even record low mortgage rates won’t stimulate home sales if consumers don’t have jobs. The jobless rate was 8.1 percent in February, according to the U.S. Labor Department.

Source: Bloomberg, Brian Louis (03/19/2009)


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