Thanks to a Fed announcement (see below) which exceeded all expectations, it was a big week for mortgage markets. Mortgage rates ended the week down significantly, falling near the lows reached in January. The stock market and Treasury market also performed well during the week.
Following Wednesday’s meeting, the Fed shocked investors with an aggressive expansion of its mortgage-backed securities (MBS) purchase program. In addition to the previously announced $500 billion in MBS purchases which began in January, the Fed will buy an additional $750 billion this year, bringing the total to $1.25 trillion. To put this in perspective, $1.25 trillion represents more than half of the estimated total mortgage issuance in 2009. Similar to its November announcement about the initial $500 billion MBS purchase program, the Fed achieved its desired reaction with an immediate decline in MBS yields. Since mortgage rates are largely based on MBS yields, mortgage rates moved lower as well.
The Fed has identified the stabilization of the financial system and the housing market as key elements of an economic recovery, and lower interest rates will help achieve these goals. Inflation data released during the week contained no reason for inflation to be a concern in the short-term. With yet another increase in government spending, though, investors will be keeping an eye out for signs of higher future inflation.
