Early Indications Of QE2 Lowering Mortgage Rates

Early Indications Of QE2 Lowering Mortgage Rates

The Federal Reserve's quantitative easing plan seems to be succeeding in its efforts to drive down mortgage rates. Major stock indexes were up today and Treasury yields were down in an early indication that financial markets are buying into the Fed's plan. Of course, bond yields and mortgage rates are always changing based on the latest news and are difficult to predict. Check current mortgage rates.

The Federal Reserve announced yesterday that it will purchase $600 billion in government Treasury bonds through mid-2011 to push down yields on those bonds. Because mortgage rates, as well as other lending rates, are tied to Treasury rates, the Fed believes mortgage rates and other rates will also fall. Bond yields move inversely to their prices.

"Lower mortgage rates will make housing more affordable and allow more homeowners to refinance," Fed Chairman Ben Bernanke wrote in an editorial published in The Washington Post today.

Purchasing massive amounts of government bonds will also lower corporate rates which will increase investment, boost stock values, and increase consumer wealth. Increasing spending, he asserted, will hopefully prompt a greater business profits and a positive economic cycle.

Bernanke defends the Fed's actions

Critics warn that the Fed's second round of quantitative easing, nicknamed QE2, could cause high inflation in the future and lead to a financial bubble. But Bernanke dismissed those warnings in his opinion piece, saying they are "overstated."

The Fed's previous quantitative easing plan little impact on the amount of money in circulation and did increase inflation, he wrote. Plus, the Fed has the tools to control inflation if it does become a problem.

At the outset of the financial crisis the Fed purchased over $1 trillion of Treasuries and government-backed mortgage-securities to successfully lower mortgage rates and other borrowing costs, thereby averting a financial collapse, he recounted.

Still, unemployment is stuck at almost 10 percent and inflation below 2 percent is not acceptable. Such low inflation is particularly dangerous, Bernanke warned, because it can lead to deflation with falling prices and entrenched economic stagnation.

Personally, I think the Fed is taking the right action and the criticisms are overblown. The current situation of unemployment, which can lead to a loss of job skills, is unacceptable. Inflation will not be a problem any time soon, if ever. While the threat of inflation and a market bubble is distant and uncertain, while current high unemployment is present problem. Another bubble in the distant future might cause high unemployment, but we've already got that now.

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