How will Fed’s Quantitative Easing impact San Jose Mortgage Rates

How will Fed’s Quantitative Easing impact San Jose Mortgage Rates for Refinance and Home Purchase? But before we get into how will this impact home loan rates for San Jose and SF Bay Area home owners, lets find out what does Quantitative Easing means!

Wikipedia defines Quantitative Easing as – “Quantitative easing (QE) is a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system, generally through buying of the central government’s own bonds to stabilize or raise their prices and thereby lower long-term interest rates. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero. It has been termed the electronic equivalent of simply printing legal tender.”

The markets still trying to work out how the Fed’s quantative easing will impact the economic recovery and the impact on interest rates, especially long term rates including mortgage rates. The Fed announced on Nov 3, 2010 it would buy up to $600B of US treasuries over the next six to eight months in a move that the Fed believes will increase the speed of recovery. The Mortgage Bonds market improved by 40+ bps on Nov 4 pushing the interest rates lower, but the very next day it lost all of its improvements as it lost 40 bps that day (see chart below).

From what I hear and read, and my own view, many do not expect the easing move to push long interest rates much lower. Mortgage rates and long dated treasuries (10 yr to 30 yr) have not rallied as most believed when the easing move was telegraphed at the Sept 21st FOMC meeting. The Fed has indicated it would confine its treasury purchases to the 3 yr to 7 yr terms and unlikely to step too deeply into buying 10 yr notes and very unlikely to buy 30s. The Fed has made it very clear that one of their primary goals is to increase the rate of inflation which is running at about 1.0% to the Fed’s target of 2.0% to 2.5%. With that as the goal investors in longer term fixed rates will likely be hard pressed to drive rates down much. Likely going to take a week or so for some consensus to emerge.

In the meanwhile, follow me on Twitter if you want to get live updates on how the Mortgage bond market is reacting to Fed’s quantitative easing. If you are shopping for best mortgage rates for a Refinance or Home Purchase in San Jose or Rest of CA complete the free live mortgage quote request form on the sidebar.

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