With few surprises from Europe or the economic data, by far the biggest story of the week was last Thursday’s Fed announcement. The Fed’s decision was extremely favorable for mortgage rates, which improved after the news and ended the week lower.
The Fed announced that it will implement a third round of quantitative easing (QE3) to boost the economy and help lower the jobless rate. Under QE3, the Fed will purchase an additional $40 billion of agency mortgage-backed securities (MBS) each month, on top of the Fed’s other programs. Unlike the first two rounds, no end date was given. Instead, the purchases will continue until Fed officials judge that they are no longer necessary. The Fed also stated that monetary policy will remain easy for “a considerable time after the economic recovery strengthens”. While most investors expected QE3, they were universally shocked by the extent to which the Fed committed to stimulative monetary policy for years to come.
Another surprise in the Fed announcement was that QE3 will consist entirely of MBS purchases rather than a combination of MBS and Treasury securities. The added demand for MBS caused mortgage rates to improve. Bernanke emphasized that Fed officials hope that supporting the housing market will lift the economy as a whole. Bernanke pointed out that home prices have begun to move higher in recent months and he expects that this week’s Fed actions will boost them more. He explained that rising home prices make consumers feel wealthier, and “they’ll feel more disposed to spend”.
After several weeks filled with highly anticipated economic events, this week will be relatively light for economic news. The Housing data will be the main focus. Existing Home Sales and Housing Starts will be released on Wednesday. Philly Fed and Leading Indicators will come out on Thursday.
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