Daily Commentary by Larry Baer: The
Federal Reserve appears set to launch a third round of unconventional monetary
stimulus later today while simultaneously signaling that a weak economy may
warrant ultra-low interest rates for at least another three years.
Not everyone believes the Fed will embark on
another bond-buying spree, and plenty of doubts remain, even among Fed governors,
about how effective another dose of fiscal stimulus will actually be.
Many economists see the Fed leaning toward an
open-ended bond-buying program that is conditional on the trend trajectory of
the economy, rather than lump-sum amounts with pre-established end dates like
we experienced with QE1 and QE2.
History does not bear out the idea the Fed's
quantitative easing move drives mortgage interest rates lower. I know it sounds
counter-intuitive -- but here's what happened.
QE1 ran from December 2008 through March
2010. The Fannie Mae 4.5% 30-year
mortgage-backed security rallied from December's close of 101.531 to an
intraday high of 102.906 on January 8th and then fell like a rock to an
intraday low of 95.500 set on June 10th, 2009 -- a decline of more than 700
basis points. From there the market
rallied very slowly to finish at a price of 100.15 on March 30th, 2010.
QE2 ran from November, 2010 to June,
2011. The Fannie Mae 4.5% 30-year
mortgage-backed security set an intraday high of 105.24 on November 4th and
then proceeded to tumble more that 600 basis-points to an intraday low of
99.906 on February 9th, 2011. As QE2
began to fade the Fannie Mae 4.5% 30-year mortgage-backed security climbed to
an intraday high of 104.687 on June 8th.
(I'm using the Fannie Mae 4.5% 30-year
mortgage-backed security as my index simply because the Fannie Mae 3.5 and the
Fannie Mae 3.0 were not trading actively during that period of time.)
As I said in yesterday's commentary -- based
on history -- I think we need to keep our fingers crossed the Fed chooses to
hold off on QE3 while simultaneously extending its conditional pledge to keep
interest rates low through late 2014.
Anything else will begin to put some serious upward pressure on mortgage
rates.
The Federal Open Market Committee is
scheduled to release its post-meeting statement at 12:30 p.m. ET. The Fed will release its forward looking
economic forecast 2:00 p.m. ET and Fed Chairman Bernanke will hold at press conference
at 2:15 p.m. ET. I'll provide
additional commentary should any of these three events provide a basis to
significantly adjust the current forecast for the trend trajectory of mortgage
interest rates.
THE
MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
