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Posted May 12, 2009
As Seen On
Home buyers and other people in the market for a new mortgage should be thanking the Fed right now.
In its post-meeting press release last week, the Federal Open Market Commitee made a few choice statements about the economy that helped mortgage rates fall for the first time in 6 weeks.
The first Fed remark was that inflation appears to slowing and that it should be under control within 6-9 months. Comments like this are good for mortgage rates because inflation causes mortgage rates to rise.
The absence of inflation, it's worth noting, tends to help mortgage rates fall.
Then, the Fed also said that economic growth should stay steady this year because the full impact of its prior rate cuts have yet to work its way through the economy.
This, too, is good for mortgage rates because economic growth is good for the U.S. dollar and a strong dollar tends to be good for mortgage rates.
But the Fed observation that made the biggest impact on mortgage rates was where the Fed noted how the credit markets are still under considerable
stress. This comment, coupled with a high-profile downgrade of the nation's largest banks, helped sparked a major sell-off in stocks Thursday and Friday.
And last week -- unlike from every other sell-off in the last 5 months -- a fair chunk of the cash borne from the stock market exodus found its way into the mortgage bond market.
The greater demand for mortgage bonds led to lower mortgage rates on conforming home loans and this would have never happened if the Fed hadn't set the table for a mortgage bond market recovery.
This week, therefore, as the stock market goes, so should mortgage rates.
If stocks are up, rates should be up. If stocks are down, rates should be down. This is happening because -- at least for now -- the mortgage bond market is serving as a safe haven from Corporate America.
And that's because the Federal Reserve made it that way.
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