- - Thursday, May 5, 2011

Last week, tor the first time in history, the chairman of the Federal Reserve Board of Governors held a news conference. It’s no secret that the Fed, which controls monetary policy, holds enormous power. Historically, financial markets have moved greatly in response to seemingly benign statements made by the Fed chairman.

It is for this reason, in part, that the Federal Reserve has remained relatively tight-lipped in explanations of its monetary policy. When explanations are made, they often are in the format of a broad-based written statement issued after a meeting.

The news conference held last week by Chairman Ben S. Bernanke was anticipated with great interest. Analysts around the country agreed on one thing: Mr. Bernanke’s words to the press had better not be a surprise, for fear of sending a shock wave through the markets.

As expected, the news conference carried no surprises and exposed no change in monetary policy. In his effort to create a more transparent Federal Reserve Board, Mr. Bernanke did reiterate the Fed’s economic outlook and its short-term intentions.

Mr. Bernanke acknowledged that inflation, which he said was previously at an unacceptably low level, has picked up to levels considered to be healthier, but not potentially dangerous. Critics have charged that Mr. Bernanke’s ultraloose monetary policy will spark dangerous inflation. Mr. Bernanke has countered that such a policy is keeping interest rates low, which is necessary to aid the ailing real estate and credit markets. He also has said that while inflation has, indeed, ticked up, that is a result of a temporary spike in energy prices.

Because short-term interest rates, which are controlled by the Fed, are already near zero percent, the Fed pulled another trick, nicknamed “quantitative easing,” or QE, out of its hat in November to help spur the economy. The Fed has been buying long-term debt such as Treasury bonds and mortgage-backed securities.

Long-term interest rates, unlike short-term rates, are governed by market forces. The Fed’s program of buying $600 billion in these financial instruments essentially creates demand, keeping the price up and the yield down, resulting in low interest rates in general. As expected, Mr. Bernanke announced the Fed will cease QE in June.

When questioned about when the Fed would begin to raise short-term rates, Mr. Bernanke reiterated the Fed’s policy of keeping rates low for an “extended period.” But, he said, “extended period is conditioned on resource slack, on subdued inflation and on stable inflation expectations.” In other words, Mr. Bernanke made it clear the Fed will not hesitate to jack up interest rates if conditions arise that will spur unhealthy inflation.

The bottom line for mortgage rates? They probably won’t fall in the coming months, but they probably won’t rise significantly either. Homeowners, if you haven’t yet refinanced, don’t miss the boat.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.