January 25, 2012
Expect An Exceptionally Low Federal Funds Rate Through Late 2014
"To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with [its] dual mandate, the [Federal Open Market Committee] expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
∙ Federal Open Market Committee Press Release: January 25, 2012 [federalreserve.gov]
First Published: January 25, 2012 12:15 PM
Comments from "Plugged In" Readers
Anybody know what the phrase "low rates of resource utilization" refers to other than the unemployment rate?
Are they talking about cash sitting at banks and not being loaned out because businesses already have their own cash hoards and don't need to take out loans? Are they perhaps referring to unsold mortgage-backed securities?
All that asked, I applaud The Fed for doing this. Looks like they're continuing Operation Twist.
Posted by: Brahma (incensed renter) at January 25, 2012 12:37 PM
Operation Alt-A anti-tsunami
Posted by: sparky-b at January 25, 2012 1:16 PM
... and in place of a tsunami that would be over with fairly quickly we could get gradually rising sea levels affecting generations instead.
Posted by: The Milkshake of Despair at January 25, 2012 1:28 PM
I keep expecting The Fed to formally announce NGDP targeting, which means abandoning the inflation mandate and instead aiming for a certain notional GDP rate.
That way if GDP growth is low, they have a mandate to pump extra money into the economy to boost inflation. Visa versa when the economy is growing quickly.
Hard to say what the target will be, probably something like 5%.
It will give them the political cover for another round of QE.
Posted by: NoeValleyJim at January 25, 2012 2:31 PM
Now's a great time to buy, as rates are low. Or, wait two years, when rates will probably be just as low. Yeah, that'll work.
I agree with sparky that this has a larger impact on housing by keeping ARM resets at low rates.
Posted by: Q at January 25, 2012 3:14 PM
NoeValleyJim, you're going to be waiting a long time. Not that I'm a monetary policy wonk, but I recall that the FOMC considered the issue at their meeting in early November 2011 and rejected the concept (scroll down to 'graph six):
The Committee also considered policy strategies that would involve the use of…nominal gross domestic product (GDP)…a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation…In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.
Emphasis added. Of course, they could change their minds. "Present circumstances" change regularly, but it probably won't be any time soon. Maybe with a different Chairman or several different voting members or (most likely) both.
I agree with Q that for practical purposes, this will put a damper on mortgage brokers running around saying "buy now, rates are going to go up and you'll be priced out forever!"
Posted by: Brahma (incensed renter) at January 25, 2012 3:33 PM
Operation repeat Japan.
Posted by: tipster at January 25, 2012 8:19 PM
Speaking of the impact of this on Alt-A ARM's, I got my 1st reset notice last week. My mortgage payment is dropping 46%. And from this announcement it looks like it will continue to remain low for at least three years.
Posted by: Rillion at January 26, 2012 9:19 AM
I am pretty sure that we would have had QE3 already if it weren't an election year. The Fed does not want to give the appearance of interfering in the political process.
But I expect that they will start something again in 2013, barring some sort of unbelievably good fortune economically.
@Brahma The fact that you read the minutes of the FOMC meetings makes you a monetary policy wonk, whether you realize it or not :)
Posted by: NoeValleyJim at January 26, 2012 9:37 AM
Gonna watch the movie "Sideways" again in honor of the Fed's announcment the other day. The movie's main character evokes a wonderful mixture of laughter and pity...sort of like the Fed's latest actions....
Posted by: VancouverJones at January 26, 2012 9:53 AM
Alt-Awesome ain't it.
Posted by: sparky-b at January 26, 2012 9:55 AM
Yes, it helps take the sting out of being so far underwater.
Posted by: Rillion at January 26, 2012 11:11 AM
Yes, it helps take the sting out of being so far underwater.
Posted by: EBGuy at January 26, 2012 11:17 AM
Sorry to here that. Now, if you are going to stay and keep paying what you were paying (or what it would rent for) will that extra into the principal get you out of being underwater in the time you think you will be there? Is it worth it or is it better to just pay less and deal with the underwater later?
Posted by: sparky-b at January 26, 2012 11:27 AM
^^sorry for the spelling error; hear
Posted by: sparky-b at January 26, 2012 11:30 AM
All you real estate people.
sell in 2012
buy in 2013
bernanke, nobama et al will keep stuff inflated for the year and the 40+ elections going on, BUT when all this subsides post Nov 2012, reality sets in the ponzi crashes big time
will be fun to watch...in meantime, listen to occupiers...their message will prove out
Posted by: johnny at January 26, 2012 11:43 AM
occupier johnny, will the next crash be more fun to watch than the last one? glad to hear you take pleasure in other people's misery and the weakening of your country.
Posted by: anon$random at January 26, 2012 12:30 PM
The 1st mortgage, which just reset to 3.25% from 6.25%, is still interest only until 2017 at which point it will recast and is supposed to be paid off over the next twenty years. The owner of my HELOC just denied extending the draw period for another five years and starting next month will require I start paying principal on the HELOC. It's at 3.5%.
The after-tax difference between the increased HELOC payment and the decreased 1st mortgage payment will still be $250 less then what I paid this month.
The biggest thing keepin me from walking away is that my after-tax all in monthly payment (1st, HELOC, property taxes, HOA, insurance, garbage, maint, and $100 a month of appliances) is still $400 under the lowest asking price on craigslist for any 2BR rental in my neighborhood, plus I have in-unit w/d and a deeded parking space in a gated lot which none of the those more expensive rentals offer.
So it makes financial sense to continue to make my payments, although I do have a desire to tell the bank that bought my HELOC (likely for pennies on the dollar) to go to hell and dare them to foreclose since they would not be able to sell the condo for enough money after expenses to pay off the 1st mortgage. But I'm not yet ready to take the credit hit for doing so.
Posted by: Rillion at January 26, 2012 12:31 PM
S-B - To answer you specific question, I'm going to save the difference for now and wait to see what happens in 2015-2017. If I do decide to let the place go at that time, I'll just move up to the mountains where I bought a foreclosed SFR last year.
Posted by: Rillion at January 26, 2012 12:42 PM
Nice. I am looking at another place now myself (although Johnny above says buy in '13). Prices out of the city are super low.
Oh and I read your first post as "recast" and not "reset". That is why I thought you had an '07 purcase.
Posted by: sparky-b at January 26, 2012 4:11 PM
When I wrote above at 3:33 PM that "this will put a damper on mortgage brokers running around saying 'buy now, rates are going to go up and you'll be priced out forever!' I was kinda sorta kidding around, but apparently Stephen Gandel, "a senior writer for TIME, covering real estate, economics and Wall Street" thinks that by keeping interest rates low, The Fed Is Undermining the Recovery:
Promising low interest rates should help goose the stock and bond markets, and it did this time around as well. Shortly after the Fed made its announcement both stocks and bonds rose. The question is whether it will have the opposite affect on the real economy.
In a regular recession, lower interest rates cause people to borrow money to buy houses or start new businesses. In a really bad recession like this one, that economic jumpstart mechanism breaks down. People are too scared to take risks. Companies look for signs the economy is back on the upswing before borrowing to expand. Confidence, not interest rates, is the real problem.
So Gandel is invoking the famous Confidence Fairy here, which is usually brought up to defend austerity measures, such as the cuts in federal spending advocated by legislators such as John Boehner (R-Ohio), during the the debt ceiling debate. For that reason alone, we should be more than a bit skeptical, but read on:
That’s why some people have been worried for a while about the signaling effect of keeping interest rates at zero. They are worried that the Fed is undermining confidence in the recovery…knowing interest rates will remain low may cause people to put off purchases. For instance, if you know interest rates are going to be low for another two years, why jump into the housing market now, when prices might still fall. But if you are afraid that interest rates will rise soon you might be more likely to buy a house now in order to get a better deal on the loan. Bernanke’s critics say raising interest rates even a little bit would do more to help confidence than keeping interest rates low for another two years or more. Interest rates have been near zero for some time now. Anyone who wants to borrow has had their chance.
Emphasis added. Apparently some Very Serious People think this way, and not just mortgage brokers who are trying to drum up business.
Posted by: Brahma (incensed renter) at January 26, 2012 5:37 PM
From the original FOMC statement, that "subdued outlook" would of course be exclusive of the "volatile food and energy sectors", wouldn't it? Because no prices in either of those categories seem to have stopped climbing. Nor, for that matter, in the costs of services, utilities, governmental/public fees, and what have you.
Posted by: The Chief (tm) at January 26, 2012 6:07 PM
"Anybody know what the phrase "low rates of resource utilization" refers to other than the unemployment rate?"
You've hit on a few points. I think they are also referring to excess capacity in many industries that might be put to good use if low rates persist and stimulate companies and people to take risk - idle plants, empty office space - that kind of thing
Posted by: been there at January 26, 2012 9:59 PM
Where are you seeing good deals sparky-b? Vacation properties in places like Tahoe and the Russian River area seem cheap. East Bay rentals are down a bunch, but still not low enough to really make that much sense from a business perspective. Stockton is super cheap, but I am not feeling so hot about future prospects there.
The Peninsula is still sky high, as is Marin. The good parts of East Bay are down some but still not cheap by any means.
Posted by: NoeValleyJim at January 26, 2012 11:26 PM
With the weak GDP numbers out today, QE3 is now a 100% certainty.
Posted by: A.T. at January 27, 2012 8:14 AM
We are looking at several vacation/summer places. Tahoe seems like there are some good deals but we've decided it's too far for us. Gold Country is a place we are looking: Arnold, Murphys. Looking at Russian River as well, and we are looking basically from Calistoga to Clear Lake.
WE aren't totally set on our parameters so it's a big new currently. We have a snow or no snow decision we are undecided on. But mainly it's for hot summers with a big yard near some water activity.
Posted by: sparky-b at January 27, 2012 8:28 AM
Yeah there are some great deals in the gold country. I bought in Amador County and got a 3BR/2BA on a 1/2 acre for $47 a square foot. Needed some work to make it livable (mainly to get rid of the smell of 10 small dogs that the previous owner had living with her). Summers are really nice up there (high enough that it cools down at night) but we are skiers/snowboarders so the fact that the place is less then an hour from Kirkwood was the reason we bought there. As for the snow/no snow decision, its at 3500 feet, so it will get some snow from the colder storms but it doesn't stay covered in snow the entire winter.
I'll be heading up there tonight for a weekend of snowboarding now that they finally got some real snow (although I have already gotten 4 days in this year on all the man-made snow).
Posted by: Rillion at January 27, 2012 9:53 AM
been there, thanks for that.
A.T., you want to be a bit more specific and predict when/which calendar quarter the new, third round of quantitative easing is going to start in? Perhaps in Q2 2012, just after Greece defaults, to provide cover?
Posted by: Brahma (incensed renter) at January 27, 2012 2:54 PM
Yes it is nice there year round, lots of different kind of activities; it's just farther than our other options.
I love Kirkwood too, can you get there that way in the heavy snow? I thought there were road closure issues.
Posted by: sparky-b at January 27, 2012 3:02 PM
If there is a very heavy snow Carson Spur on 88 will close while they work on it to clear potential avalanches. But Caltrans does a good job of getting it open quickly. We've been staying at our friends house (next door) for the past six years and have only missed about three days of skiing because of 88 being closed and had to cut out early a couple times to make sure we could get home before enough snow fell to close the road.
Posted by: Rillion at January 30, 2012 9:24 AM
That is great to know.
Posted by: sparky-b at January 30, 2012 9:38 AM