Federal Reserve meets

Monday, Dec. 14
Posted: Written 10 a.m. EDT

FED MEETS: The Federal Reserve's rate-setting committee meets this week. The panel will release its monetary policy statement around 2:15 p.m. EDT Wednesday. The Fed isn't going to raise short-term interest rates. Instead, the committee might describe the methods and timing of taking money out of circulation to keep inflation at bay.

The Fed pledged to buy up to $1.25 trillion in mortgage-backed securities by the end of next March, and it is well on its way toward meeting that goal. When the Fed buys mortgage-backed securities, it puts money into the financial system. It's simple. Let's say you're the Bank of Me, and you have lent some of your money to a homebuyer. You sell the mortgage indirectly to the Fed, and in return you get money, which you can lend again. Someday, when employment picks up, all of that money sloshing around in the financial system could lead to runaway inflation.

So at some point the Fed will sell those mortgage-backed securities that it has been buying. Investors will take their cash and give it to the Fed, which will exchange the cash for mortgage-backed securities. The Fed can park that money, taking it out of circulation. With less money in the financial system, inflation will be lessened. That's the theory, anyway.

This is my long way of telling you that the Fed has several ways to flood the financial system with cash, and an equal number of ways to take cash out of the financial system. Raising and lowering the federal funds rate is just one of those methods. In fact, raising the federal funds rate will be one of the last ways that the Fed will tighten the money supply. That probably won't happen until the latter half of 2010. By that time, mortgage rates almost certainly will have risen in response to economic recovery and the Fed's use of its other monetary tools.

That doesn't mean that I expect mortgage rates to shoot up this week. I don't expect this week's Fed meeting, by itself, to have a lasting effect on mortgage rates.


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