Fed to Buy More Government Debt to Prop Economy - Mortgage Rates Likely to Fall Further

The Fed today released its FOMC statement, in which it painted a picture of an economy that is not growing as quickly as anticipated.

"Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated."

According to a WSJ article, more than 75% of economists now believe that deflation is a bigger threat to the economy than inflation. What a change! Just six months ago these same economists were worried about a massive inflationary spiral kicked off by high government borrowing. If you don't like deflation, wait another six months and we'll be back to inflation.

But in the meantime, if you are looking to buy a home or refinance, rates may get even better. The Fed said:

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

Ten year Treasury yields fell from 2.83% yesterday to 2.76% today. Last month, the 10 year yielded 3.06%. The 10-year is the benchmark rate for 30 year mortgage rates, meaning that if it falls, mortgage rates will also fall. As I reported yesterday, 30 year rates are already at a 50 year low of 4.60%, and many are predicting they will go lower. It's conceivable that 15 year mortgage rates could fall below 3.5% in the next six months.

While savers are suffering, mortgage borrowers have never seen rates so low.

Check mortgage rates in your area.