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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Mortgage rates drop below 5 percent

Oil price goes up, dollar falls in response to Fed action

Jeannine Aversa And Alan Zibel Associated Press

WASHINGTON – Mortgage rates tumbled to historic lows Thursday after the Federal Reserve’s sudden decision to print $1.2 trillion and pump it into the economy, a move that also triggered warning signs of inflation – a weaker dollar and the highest oil prices of the year.

The national average rate on a 30-year, fixed-rate mortgage fell to 4.94 percent, down nearly a quarter of a percentage point from a day earlier, according to financial publisher HSH Associates.

It was the first time the average had fallen below 5 percent since the publisher began keeping records in 1979. But mortgages were not exactly being passed out freely. Lenders remain extremely strict about who qualifies.

“The real story here is that the low rates are available only to solid gold borrowers,” said Don Fader, a North Carolina mortgage broker who was quoting a rate just above 4.6 percent for mortgages Thursday.

The Fed announced Wednesday it would buy $750 billion in mortgage-backed securities and $300 billion in Treasury debt. It also will double its purchases of debt issued by Fannie Mae and Freddie Mac to $200 billion.

Because spending that kind of money requires the Fed essentially to print money, it meant risking inflation – and on Thursday there were early indicators that was exactly what was happening.

It cost more than $1.36 to buy a euro, more than 2 cents higher than the previous day – an unusually large leap. And the British pound gained 3 cents against the dollar, which fell sharply against the Japanese yen.

The jump in oil prices was even more dramatic. The price of a barrel of crude oil went up nearly $3.50, or 7 percent, on the New York Mercantile Exchange, to its highest level since early December.

That doesn’t mean inflation is a sure thing, by any means. In fact, most economists think high unemployment and sluggish consumer spending will keep inflation in check as businesses hold down prices.

And given the poor shape of the economy, the Fed made clear that – for now – it isn’t worried about inflation. It’s more concerned about falling prices, or deflation. The country’s last serious bout of deflation came in the 1930s.

The move was notable for its immediacy. Seemingly at the flick of a switch, the Fed was able to train a $1.2 trillion fire hose on the economy – a sharp contrast to the slower, messier wrangling in Congress over the $787 billion stimulus plan.

“While Washington watches the economy burn, the Fed is fighting the financial fires,” said economist Ethan Harris at Barclays Capital.