The Fed Lowers Rates

Today the Federal Reserve lowered short-term interest rates, the Fed Funds Rate, by 3/4%.

Here is some of what they said in their policy statement--

· The risk of inflation has decreased appreciably.
· The Fed will continue buying large quantities of mortgage backed securities or MBSs and will expands its purchase of MBS if needed.
· Weak economic conditions are likely to warrant exceptionally low Fed Funds Rate for some time.
· Going forward the Fed’s focus will be to support the functioning of the financial markets and to stimulate the economy. (No mention of their mandate about containing inflation.)

Here is what I think we will see happen--

* We will probably see the Fed Funds Rate at 2% or lower throughout 2009.

· It appears that the Fed is committed to keeping mortgage rates super low. How low? I don’t know for sure. I would assume with 99% certainty a rate below 5.50% and with 60% certainty rates below 5%.

· For how long? I could see this being the case for 6 to 9 months maybe. Why? Fewer people normally buy a home in the dead of winter and we are 4 months away from the peak buying and selling season. Or until housing sales rebound nicely nationwide.