Last week in their monetary policy statement the Fed acknowledged that they were concerned about the strength of the economic recovery and that they stood by ready to act to stimulate the economy if needed. Given that short-term interest rates are already close to 0% their traditional mechanism for steering the economy has already been deployed. Therefore, the markets are assuming that they will in engage in further quantitative easing through the purchase of US Treasury securities including notes and bonds. The impact of this action is to drive long-term interest rates lower which should also help mortgage rates.
Following the Fed’s announcement last week rates did dip in anticipation of future easing. The 10-year Treasury note yield dipped to around 2.50% from 2.75% earlier in the week (mortgage rates only benefited by about .125%).
However, it’s important to note that the Fed has yet to commit to any action. They’ve only stated that they stand by ready to act if needed. In this morning’s WSJ Jon Hilsenrath reports that the Fed is more likely to take smaller-scale and more gradual approach to quantitative easing than their last action in 2009. If he’s right it will be interesting to see how interest rates react.
For now interest rate analysts will be closely watching the economic data that is released from now until the Fed’s next monetary policy meeting at the beginning of November. If the economic data is grim it will strengthen the case for further quantitative easing on the part of the Fed and rates will benefit. If it’s stronger than expected the Fed will be more likely to forgo any more stimulus which will hurt rates.