Surprising News from the Fed

Yesterday, Ben Bernanke, the chairman of the Federal Reserve, stunned economists and investors alike with his announcement that the Fed will not begin a tapering off of its economic stimulus program ($85 billion dollars spent per month on mortgage and Treasury bonds). This was the exact opposite of what many predicted and expected.

The announcement sent stocks soaring. Standard & Poor’s 500-stock index and the Dow Jones industrial average reached new nominal closing highs, while the Nasdaq composite index gained a full percent–it hasn’t had a closing that high since September of 2000. The Treasury saw an increase in its 10-year note, while the yield dropped (a normal occurrence when the demand for Treasury products goes up).

According to Bernanke, one reason for the decision stems from rising interest rates. The Fed’s Federal Open Market Committee believes that while the economy certainly has improved, it is not in a strong enough position for adjustments to be made right now. Bernanke stated that a reduction in the economic stimulus program could occur as soon as next month, but he also mentioned next year as a possibility.

So how will this affect the housing market?

Some say that this announcement could cause a drop in mortgage interest rates, which in turn may help to further bolster the housing market.

Regarding housing, Bernanke stated that:

“Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully.”

There is quite a bit of confusion about this announcement and lots of people are weighing in with opinions. More to come on this in the coming weeks.

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