Interest rates edge down to new record lows again

Interest rates moved down slightly again this week to new record lows .The following are excerpts from the newsletter on interest rates published by HSH Associates :

“At the moment, and regardless of any declared finish line, mortgage and other interest rates are going nowhere fast. . . . monetary policy will remain largely on hold until the unemployment rate moves toward 6.5% and/or inflation moves above 2.5%. Even if these official benchmarks aren’t attained, the Fed may change policy if expectations for future inflation become less “anchored”, or the attainment of a given unemployment rate comes not through job creation, but rather from people giving up looking for work.

To enhance their ability to influence interest rates, the Fed also embarked on an open-ended program comprised of outright purchases of new Treasury bonds in an amount of $45 billion per month, at least to start. Of course, the Fed may adjust the size of purchases as it sees fit. However, unlike the money-recycling program of Operation Twist, where short-term holdings were sold and long ones purchased, this one will expand the size of the Fed’s balance sheet, and the increase of money into circulation as a result has raised inflation concerns. This program joins an existing open-ended commitment to purchase some $40B per month in Mortgage-Backed Securities (QE3).

Although the Fed generally expects its previously described time frame to hold — that is, policy remains unlikely to change perhaps until 2015 sometime — the new goals-based policy means that changes could come sooner or later than then. As the economy goes, so will go Fed policy. Let us hope that the Fed is correct in its assessment that it can manage these unconventional policies well. Should we get a spate of inflation as a result of them at some point, by its own guidance the Fed would have no choice but to raise rates, unemployment above 6.5% or not.

What it does mean is that the time of low interest rates will be with us for a while yet to come. It also means that future mortgage shoppers will need to watch the data and read the economic tea leaves so as to not be caught off-guard when the Fed does finally decide to change its stance. That won’t be today, tomorrow and probably not even next year.

Between now and then, it will remain a fantastic time to finance or refinance a home. Rates can be expected to wobble around, of course, but should be reliably low though the winter and into the spring. Should the economy not fall off a cliff, and should any deal which comes instead not create a new economic mess, we might see an even stronger housing market before too much more time passes.

We’ll know more about the housing market as next week unfolds. Mortgage rates will probably tick a couple of basis points upward as they continue to wobble in a narrow range.”

The following are interest rate quotes from Al Hermann of American California Financial: