When the Federal Reserve announced back in May that it would, at some point in the future, slow its purchases of MBS, the fixed income market responded with a sell off that increased the yield on the 10 year Treasury from its May low of 1.66% all the way to the early September peak of 2.98%. Mortgage rates, which are tied to the 10 year Treasury yield, jumped by about 1.25%.
Here's a table showing the yield on the 10 year Treasury and the 30 year mortgage rate for different times this year. Note that Freddie Mac published its mortgage rate on Wednesday, before the impact of the Fed's decision was felt. By today the 30 year mortgage rate was down to 4.375%.
<a href="http://oliverreports.com/wp-content/uploads/2013/09/10-year-and-mortgage-rates.png"><img alt="10 year and mortgage rates" src="http://oliverreports.com/wp-content/uploads/2013/09/10-year-and-mortgage-rates.png" width="293" height="262" /></a>
I think it is pretty obvious that the US economy is doing ok, but no more. The unemployment rate is down, not because more people are working but because fewer are looking for work. Inflation remains below the Fed's target of 2% and there are any number of uncertainties on the near-term plate, not the least being the forthcoming ritual debt ceiling angst.
Against that background, raising interest rates too early risks choking off whatever recovery has occurred.
It is interesting that at 4.375% mortgage rates are not far off the year end forecast made at the end of 2012 by the Mortgage Bankers Association.
So, with a few zigs and zags along the way, we may end up the year close to the MBA's forecast. What we should all hope for is an economy that is growing fast enough to create new jobs, give reason to those who have given up the search for a job to return, and increase average earnings. That in turn would produce increased consumer spending and increased demand in the economy. Some time after all that is achieved, a rise in interest rates would be a positive indication that the economy is growing strongly.
Mr. Bernanke has just found out that, in the meanwhile, the economy continues to need all the help it can get just to bobble along at plus or minus 2%.
*When a bank issues a conventional mortgage it sells the loan to Fannie Mae or Freddie Mac, who pool the loans and sell interests in the pools to financial institutions as mortgage backed securities. The Fed’s goal in buying MBS is to drive down the yield on such pools and hence drive down the mortgage rate to borrowers.
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