“This week there is a good chance that the Federal Reserve in the United States will announce that it is going to print some more money. The reason will be that the US economy has yet to find its legs and they feel a need to give some extra artificial support in order to buy time for the private sector to get back on its feet and spending again. That buying of time aspect is essentially all governments can do when they ease fiscal policy to help growth and all central banks can do when they cut interest rates or in this case take the extreme measure of printing money. In technical terms the operation is called quantitative easing and it does not actually involve any extra physical notes being printed. It goes like this.

The US government is running a very large deficit near US$1.3tn. In order to finance it they usually borrow the money from the public. That means that the $1.3tn more the government spends than it receives in tax revenue is voluntarily taken out of circulation by investors in exchange for promises that they will be repaid the money plus interest some years down the track. The net cash effect is zero. Quantitative easing involves the Federal Reserve buying some of the bonds issued to fund the federal deficit. But the money the Fed. uses to buy the bonds does not come from private sector bank accounts. They simply make a note in their accounts that they have an asset in the form of US government bonds while the government marks a liability in its balance sheet. So where does the money printing as it were come in?

Money that was going to flow from the private sector out of the system to the government does not do so. It stays put in other investments like shares and bank accounts. That effectively is the money which is printed – the stuff that does not leave. By staying in bank accounts etc. there is a net addition to funds circulating in the economy caused by the over-spending of the government – wages etc. Extra money sloshing around means extra downward pressure on interest rates which in theory will help the economy. In practice however a key thing happening in the United States which is keeping the economy weak is an unwillingness on the part of banks to lend more money exceeded in many cases it seems by the unwillingness of consumers and businesses to borrow it.

Therefore the low interest rates which will stay around for longer may not have much effect at all. It is not the price of money people are basing their borrowing decisions on at the moment but their confidence – which is lacking. But the extra money sloshing around does not all simply sit in banks. Some goes into other assets like property, shares, and commodities. People are wary of property understandably given what has happened. There are many feeling the sharemarket is looking over-stretched when one considers the immediate prospects for growth look poor.

That leaves other assets as potentially major beneficiaries of the Fed.s money printing exercise. We think these other assets likely to find favour are going to be predominantly found outside the United States. That means extra upward pressure on commodity prices by investors increasingly talking about a long term commodity price cycle in particular. It also means funds flowing into non-US sharemarkets and currencies and particularly those of fast growing developing economies.

This is what worries the likes of China, Brazil, and many other countries who see their currencies as likely to rise against the greenback. This is where the big relevance to us comes in. Extra funds seeking non-USD dollar investments with a potential bias toward commodity-type assets are quite likely to push the NZD above US 80 cents within the next few months. And as we discussed last week there is essentially nothing sensible the Reserve Bank will be able to do about that. And for those exporters who are going to be affected by a stronger NZD it pays to think about it in the following terms. The greenback is weakening because the US economy is struggling under the weight of truly massive bad debts.

Personally I prefer our combination of an overvalued currency and good Kiwi accounts to the appalling mess they are in which seems destined to get phenomenally worse in coming years as the Federal government one day starts to attack a debt situation rapidly becoming unsustainable. “

Zeus Has Unleashed the Cracken on MBS

I know, cheesy headline but c’mon. Look at the chart above. See that last big Red Bar on the right? That represents the price drop in the 4.5 FNMA Mortgage Coupon. Too technical? Just know that if a price of a bond goes down, the yield or interest rates that is passed on to borrowers is higher. So, the more and bigger the red bars you see, the worse rates get.

This is a significant argument that the FED MBS purchase program that was announced in Nov 2008 had a definite impact on mortgage rates. Most experts agree the FED intervention affected rates by over 1% If that’s true, then rates could be headed up over 6% in short order.  They spent $1.25 trillion on the program, affected the range by 1.75 (6.25% – 4.5%) and rates changed up to 5 times per during the program term Nov 2008 to March 2010.

Do You Know When to Lock Your Rate?

During the timeline outlined above, rates were on a nauseous roller coaster ride. The above chart is a snapshot of the market in real time. Most consumers don’t have access to this info, but a good loan officer does, at least they should. If you are out rate shopping in Oregon or Washington for a home loan, I am an active loan officer and if you have questions about rate volatility, when to lock or other mortgage related questions, give me a call or send me an email.

“Unleash The Cracken”! — Zeus

In its press release, the FOMC also noted that the U.S. economy “has continued to strengthen” and that the jobs markets “is stabilizing”. It also said that business spending has “has risen significantly”.

This is a slight departure from the Fed’s January statement in which housing was not mentioned and business spending was said to be “picking up”.

It’s also the sixth straight statement from the FOMC in which the Fed described the economy with optimism. This is a signal to markets that 2008-2009 recession is over and that economic growth is returning.

The economy is not without threats, however, and the Fed identified several:

1. High unemployment threatens consumer spending
2. Housing starts are at a “depressed level”
3. Consumer credit remains tight

The message’s overall tone, however, remained positive and inflation is within tolerance limits

Even bigger new for you and I in the mortgage world, Bernake also confirmed the end of its $1.25 trillion commitment to the mortgage market by March 31, 2010.  This is huge for the Real Estate Mortgage Markets. See my earlier post FED Pulls Out in 37 Days: You Need to get Your Butt in Gear! from February 2010 for my thoughts. Fed insiders estimate that the bond-buying program lowered mortgage rates by 1 percent since its start.

Mortgage market reaction to the Fed press release is, in general, ambivalent. Mortgage rates are unchanged this afternoon.

The FOMC’s next scheduled meeting is a 2-day affair, April 27-28, 2010.

The Federal Open Market Committee voted to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

In its press release, the FOMC noted that the U.S. economy “has continued to strengthen”, that the jobs markets is getting better, and that financial markets are supportive of growth.

There was no mention of the housing market’s strength.  The last 3 statements from the Fed included that specific verbiage.

It’s the fifth straight statement in which the Fed spoke about the economy with optimism.  This should signal to markets that 2008-2009 recession is over and that economic growth is returning to U.S. economy.

The economy isn’t without threats, however, and the Fed identified several in its press release, including:

1. Credit remains tight for consumers
2. Businesses are reluctant to hire new workers
3. Housing wealth is down

The message’s overall tone, however, remained positive and inflation appears is still within tolerance.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period” and to wind down its $1.25 trillion commitment to the mortgage market by March 31, 2010.  This is noteworthy because Fed insiders estimate that the bond-buying program suppressed mortgage rates by 1 percent through 2009.

Mortgage market reaction to the Fed press release is, in general, negative. Mortgage rates are rising this afternoon.

The FOMC’s next scheduled meeting is March 16, 2010.