The Federal Open Marketing Committee

The Fed is clearly doing “EVERYTHING” it can to stabilize the housing market and head off a prolonged period of deflation that would be difficult to break.
Of particular note: The Fed is substantially increasing its support of mortgage lending and housing markets. The FOMC committed the Fed to buy an additional $750 billion in agency mortgage-backed securities, bringing its total purchases of these securities to $1.25 trillion this year.
Moreover, the Fed will increase its purchases of agency debt by $100 billion to a total of up to $200 billion. Both measures are designed to increase the ability of Fannie Mae and Freddie Mac to expand their balance sheet and reduce the cost of “conventional” mortgages.
If that wasn’t enough to get borrowers’ and lenders’ blood pumping, the FOMC threw in a kicker: they committed to buying $300 billion worth of long-term Treasury securities, an action they had signaled they were prepared to do at some time. This is huge in my opinion, perhaps the policy impact of greatest importance. The Fed is committing itself to monetizing the debt of the Federal government in order to push down general long-term interest rates and restart a refinancing wave. Given the reluctance of foreigners of late to finance our growing federal deficit, this will be a necessary step toward recovery. But the potential costs of this action are increasingly problematic. It is like a cancer patient that is given a heavy dose of chemo and radioactive therapy to cure their cancer, but the patient first appears to get sicker with each passing day. Renewed dollar weakness is likely. Longer-term, the U.S. economy could face higher inflation and higher interest rates down the road.
The FOMC also said it is likely to expand the range of eligible collateral for the Term Asset-backed Lending Facility (TALF) to include other financial assets on top of the ones already promised.
Bottom-line, these actions by the Fed today certainly increase the chances of a housing bottom sometime this year, and a return to economic growth by year end. Ten-year Treasury yields plunged by a half a percentage point shortly after the statement, which will drive significantly lower mortgage and corporate bond rates across the country. I sense a refinancing or financing opportunity coming on.
Scott Glass Wells Fargo Home Mortgage (949) 282-4007 Tel Scott.Glass@wellsfargo.com