Forecast for Interest Rates

Wednesday’s Fed announcement was very favorable for mortgage rates. Last week’s mixed economic data, Treasury auctions, and news from Europe had little influence. As a result, mortgage rates ended the week lower.

The forecasts from Fed officials for the fed funds rate contained some major surprises for investors. Fed officials now expect that economic conditions will allow the fed funds rate to remain at exceptionally low levels until at least ‘late 2014’. Prior statements extended the expected time frame only to mid-2013. In addition, comments from Fed Chief Bernanke suggested that Fed officials would like to see stronger economic growth, and they are open to the possibility of additional Fed easing. Many investors think it is likely that the Fed will announce additional MBS purchases at a later meeting. The expectation for a low fed funds rate and the possibility of additional Fed purchases of mortgage-backed securities (MBS) increased demand for MBS, which resulted in higher MBS prices and lower mortgage rates.

Friday’s release of Gross Domestic Product (GDP) showed an increase at a 2.8% annual rate during the fourth quarter of 2011, which was a little below the consensus forecast, but up from 1.8% during the third quarter. Early estimates for the first quarter of this year are for a slower growth rate. The long-run average growth rate for the economy is generally considered to be around 3.0%, and the economy usually grows at a faster than average rate following a recession. Given that the economy is growing below its potential and that inflation remains tame, the Fed’s expectation that monetary policy will remain very stimulative for a long time is understandable.

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