QE2 and Mortgage Rates: Measuring the Fed's Strategy
January 27, 2011  weekly update 

Note from dshort: The charts below include the latest data from Freddie Mac's Weekly Primary Mortgage Market Survey. As I post this, the Bankrate.com overnight average for the 30-year fixed a virtually identical 4.81%.

How will we know if the current round of quantitative easing is a success? A key sign will be that a variety of rates will fall — at least until the economy reaches liftoff, which probably means sustained (two or more quarters) real GDP north of 3.3% (the long-term GDP average). I'm already tracking Treasury yields on a regular basis (Treasury Yield Snapshot). Spreads have widened, which should be pleasing to the Fed, but the rising yields at the short end are probably not the Fed's intention.

Another rate to watch is the 30-year fixed mortgage. Here is a chart I'll be updating weekly to monitor progress. I've also included the Core CPI (the Consumer Price Index excluding food and energy) to help us evaluate the changes in the mortgage rate relative to the broader economy. Lower mortgage rates should in theory benefit the housing market and boost the broader economy.

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For a bit of historical perspective, here's look at 30-year fixed mortgage rate since 1971, courtesy of weekly data from Freddie Mac.

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Real GDP for Q3 stands at 2.6%. Tomorrow's Advance Q4 GDP release will give us a clue if the economy is heading back above the long-term average.