Fed slows mortgage plans
Reduced urgency of debt-buying program seen as a sign of confidence in rebound
WASHINGTON – Signaling confidence in a recovery, the Federal Reserve decided Wednesday to stretch out the pace of a program intended to lower mortgage rates and prop up the housing market.
Even so, rates on home loans are expected to remain low.
To foster the recovery, the Fed also decided to hold the target range for its key bank lending rate at a record low of between zero and 0.25 percent.
Stocks fell as a brief rally followed the Fed’s statement and then faded. The Dow Jones industrial average came within 82 points of crossing 10,000 for the first time since October but ended with a loss of 81.
With the economy on the mend, the Fed said it now plans to reach its goal of buying $1.45 trillion in mortgage-backed securities and debt by the end of March, rather than by the end of this year as originally scheduled. It’s the second time since August that the Fed has opted to slow emergency programs designed to encourage spending and boost the economy.
Those decisions show Fed Chairman Ben Bernanke and his colleagues are shifting from managing the financial and economic crises to nurturing a budding recovery.
In a far brighter assessment, Fed policymakers said: “Economic activity has picked up following its severe downturn.” In August, policymakers said economic activity was “leveling out.”
The Fed again pledged to keep its key lending rate at a record low “for an extended period.” Economists predict that means through the rest of this year and perhaps into part of next year.
Holding that rate steady means commercial banks’ prime lending rate – used to peg rates on home equity loans, certain credit cards and other consumer loans – will stay at about 3.25 percent, the lowest in decades. The goal is to entice people and businesses to step up spending to aid economic growth.
Yet even so, Fed policymakers predict inflation will remain “subdued for some time.”
Analysts say mortgage rates should remain low for now but could eventually head higher. That’s why homeowners who want to refinance mortgages shouldn’t delay, said Greg McBride, senior financial analyst at Bankrate.com.
McBride said rates will eventually be pushed up by the Fed’s gradual withdrawal from the market, the strengthening housing market and the likely increase in inflation as the economy stabilizes.
Refinancing is especially urgent for people eligible for a separate government-backed refinance program, which expires in June, McBride said. But he said homeowners in adjustable-rate loans whose payments fell this year also need to move quickly.
“They could be tempted to put their heads in the sand on refinancing for another 12 months,” he said. “It could be a different story 12 months from now,” with much higher rates for 30-year fixed rate mortgages.