Fed Takes Giant Step Toward Lowering Interest Rates

Despite the fact that lowering short term interest rates usually results in higher long term rates such as mortgages, language in their statement prompted huge gains for Mortgage Backed Securities (MBS).  The higher MBS securites go the lower interest rates will be.  In a unanimous vote, the Fed cut the target Fed Funds rate from 1.00% to a range between 0.00% and 0.25%. The 75 basis point cut was larger than the consensus forecast for a 50 basis point cut. This marked the first time that the Fed has targeted a range rather than a fixed value, reflecting that it is more difficult for the Fed to precisely target a rate in the current market environment. The Fed's statement confirmed that economic conditions have worsened recently and suggested that rates will remain at extremely low levels for an extended period of time. Also notable, the Fed will employ "all available tools" to stimulate economic growth, including the purchase of large quantities of MBS. Investors believe that the Fed indicated that it will throw everything it can at fighting the current economic weakness, and both stock and MBS markets were pleased with the statement.

With the recent volatility in MBS markets, I'll be switching the on-coupon to the 30-yr 4.5% to better reflect current market conditions.