- - Thursday, January 12, 2012

The minutes of the Dec. 13 meeting of the Federal Reserve Board of Governors revealed the Fed is adopting the strategy of being more transparent when communicating its intent on the movement of short-term interest rates.

The Fed controls two key interest rates: the federal funds rate, which is the rate banks charge each other for overnight funds, and the discount rate, which is the rate the Fed charges banks when it lends them money.

Starting at the next meeting, the Fed will include in its statement the likely path of where it intends to put interest rates in coming months. The new policy is designed to give markets more clarity on the Fed’s intentions and thus reduce surprises that can rattle markets.

One of the primary reasons for the new policy, according to Fed watchers, is that the market became convinced falsely and prematurely that the Fed was likely to raise rates. This perception may have hindered economic recovery.

Actually, Fed Chairman Ben S. Bernanke already has made the Fed more transparent than under his predecessor, Alan Greenspan. Several months ago, he announced the Fed would keep short-term rates near zero percent until at least mid-2013.

I’m no expert at analyzing Fed policy, but in my 25 years in the mortgage business, it was the first time the Fed announced something so bold and forthright.

So what does this mean for the average American? Does this mean mortgage rates will remain at historic low levels for the next 18 months? Not necessarily.

I recently read a column by economic Nobel Prize winner and New York Times columnist Paul Krugman. The premise of the column was that the national debt is not as much of a threat as many politicians want us to believe.

I’m in no position to argue with a Nobel-laureate economist, but he mentioned politicians’ scare statements that government deficits are sure to make interest rates soar and then pointed out that rates remain at historically low levels.

He failed to mention a couple of possible reasons why long-term rates are so low. First, the European crisis has caused a “flight to safety” in world markets. Investors are gobbling up U.S. Treasury bonds. Despite the fact that the U.S. economy is on shaky ground, the rest of the world is worse off. This demand is pushing bond prices up and yields down.

Second, he did not mention the Fed’s “quantitative easing” policy, which basically turns the Fed into another giant customer of U.S. Treasury bonds, creating more demand and resulting in low rates.

The consensus is that mortgage rates will remain low, at least through 2012. Most analysts don’t think this will have a major impact on the dead-in-the-water housing market, but refinancing activity should remain high. As one economist recently pointed out, however: “The problem is still the availability of credit, not the price of it.”

There are still millions of creditworthy homeowners unable to take advantage of these fabulous rates because they don’t, for a variety of reasons, meet the unreasonably restrictive guidelines set forth by mortgage giants Fannie Mae and Freddie Mac.

I’ve said this before, and I’ll say it again. The system needs a large injection of common sense.

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

Copyright © 2016 The Washington Times, LLC. Click here for reprint permission.

blog comments powered by Disqus

 

Click to Read More

Click to Hide