The Federal Reserve said it would initiate a third round of quantitative easy by buying $40 billion worth of Freddie Mac and Fannie Mae mortgage backed securities each month, Bloomberg News reported. The acquisitions are aimed at keeping down long-term interest rates, including those for home loans, so that spending and hiring will increase, Chairman Ben Bernanke said (see video above).
Combined with the money it already pours into the agency mortgage market, the Fed estimated it would be spending approximately $85 billion per month through the end of the year.
Overall, it remains to be seen how the announcement will impact already-low mortgage rates, according to CNBC. In the first round of quantitative easing, which also involved buying agency securities, mortgage rates dropped 85 basis points between Thanksgiving and the end of the year in 2008. The second round, in 2010, had the opposite affect, although the Fed was purchasing Treasury notes at that time, which stoked fears of inflation, CNBC said.
Analysts quoted by both CNBC and Bloomberg expected the Fed to announce a purchase of more than $300 billion worth of securities. However, with the open-ended announcement of a monthly figure, it’s unclear how mortgage rates will be impacted. Before the plan was released CNBC speculated that if the announcement exceeded the expected $300 billion-plus in purchases, mortgage rates would fall. If the quantitative easing fell below expectations, rates would rise. [CNBC] and [Bloomberg] — Adam Fusfeld