Today’s release of the official statement from the Federal Reserve following their two day meeting was not supposed to contain many surprises as the FOMC target rate could not move lower and the majority of economists expected the statement text to be relatively unchanged.

Well, the Fed threw us a curveball and announced it would be committing over $1 trillion dollars to provide support to the mortgage lending and housing markets. It will be committing $300 billion to purchasing long-dated treasuries over the next 6 months and also would be purchasing an additional $750 billion of agency mortgage-backed securities.

The Fed is telling us that mortgage rates ARE NOT GOING HIGHER any time soon and are likely to head lower to perhaps 4%. David Greenlaw of Morgan Stanley makes the following point:

This could represent a powerful source of stimulus for the household sector of the economy. In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year.

David Greenlaw, Morgan Stanley, WSJ Real Time Economics March 18, 2009

Effectively, lower mortgage rates represent another stimulus package for the economy, as homeowners who are able to refinance now have extra money in their pockets each month, and this is potentially a large number.

Ben Bernanke is doing what he knows best — Printing Money. He is a student of the Great Depression and has spent his entire academic career studying what went wrong and crafting the right approach to the situation. He was called “Helicopter Ben” after he theorized that the correct approach would be for the government to essentially print money and drop it out of a helicopter.

The Fed has been extremely vigilant in averting an all-out depression and will continue to do so, as Bernanke indicated in his recent 60 minutes interview. Through its numerous lending facilities and outright purchases of securities in the market, the Fed will continue to expand its balance sheet until the financial markets are functioning properly again.

Many people got burned today being short the treasury market as the 10 year yield plummeted almost 50 basis points on the news, and they probably are right when you hear them say ” there is a massive bubble in treasuries”. I think the key here is to understand that the Fed is going to do everything in its power to keep interest rates low until a sustained economic recovery is on the way.

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