Will Interest Rates Go Any Lower?
Historic, low home loan rates have been about the only thing stable in the economy these days. This low level mark breeds complacency, especially with the buzz in the air that rates may go even lower. But the question hangs in the air - will rates go lower? And if there is a chance, should you wait and see or move forward now? Rates are currently low and have been low because of something the government, specifically the Federal Reserve, has been implementing a policy that they call Quantitative Easing - Quant-what you may ask? Well pretty much the government has been pumping money into the economy by buying loans from banks that originate them.
The more technical terms per www.Wikipedia.com"The term quantitative easing (QE) describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.
"Quantitative" refers to the fact that a specific quantity of money is being created; "easing" refers to reducing the pressure on banks."
The buzz of interest rates going even lower began earlier this fall stemmed from talk coming out of the Federal Reserve that they were considering another round of Quantitative Easing in an effort to stimulate the sluggish economy.
During the first round of quantitative easing, implemented during the credit crisis, the Federal Reserve bought Mortgage Backed Securities (MBS) which helped drive home loan rates lower.
The Federal Reserve announced their new bond-buying program at their monetary-policy meeting back in November of 2010 and they will be purchasing $600 billion in Treasuries through June 2011. This second round has been dubbed by the media as QE2.
- To create inflation and avoid a deflationary economy
- To lower the unemployment rate
- To boost Stock prices
One of the most important things to understand is this: the three goals of QE2, while meant to improve our economy overall and for the long-term, are unfriendly to Bonds and home loan rates. And that has been evident since the program has been introduced, as Bond prices and home loan rates have increased a whole half an interest rate point.
In fact, last week legendary investor Warren Buffet said, "I think short-term and long-term Bonds are a very poor investment at the present time." If Mr. Buffet thinks long-term Bonds are a poor investment right now, he is saying home loan rates can't come down much further - and the risk in waiting around for that to potentially happen does not outweigh the potential reward.
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Michael RodriguezPosted January 11, 2011 7:05 PM
