Mortgage rates fall almost a quarter percent
By Holden Lewis • Bankrate.com

Housing starts are astronomically high, businesses are hiring, the unemployment rate is dropping, the economy grew incredibly fast from July through September and American workers are evermore productive. In the past, all of this news would be considered a harbinger of rising interest rates. But that was then and this is now.

In the last two weeks, Federal Reserve officials have delivered speeches in which they implied strongly that the Fed won't raise interest rates anytime soon. Yields on Treasury notes have dropped ever since, and mortgage rates have followed.

The benchmark 30-year fixed-rate mortgage fell 22 basis points to 5.86 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 6.08 percent.

The 15-year fixed-rate mortgage fell 23 basis points to 5.19 percent. The one-year adjustable-rate mortgage fell 19 basis points to 3.96 percent.

The Fed's latest round of message-delivering spanned two continents. Michael Moskow, president of the Federal Reserve Bank of Chicago and a member of the Fed's rate-setting committee, told a conference in Vienna that he expects the economy to continue growing like gangbusters. "In turn, the U.S. currently seems to be in the neighborhood of price stability -- which is to say we appear to be at a point where inflation is not an important factor influencing business and household spending decisions."

In fact, Moskow added, "the Fed is actually now slightly more concerned about inflation falling further and perhaps becoming undesirably low than we are about it becoming too high." And that's why the federal funds rate, upon which the prime rate is based, remains stubbornly at 1 percent, he said, because such a low rate provides "some insurance against unwelcome disinflation."

There had been speculation that the Fed would have to change its tune about the prospect of inflation falling too low. After each rate-setting meeting, the Fed issues a statement explaining its action. That statement has warned about low inflation since the May 6 rate-setting meeting. Moskow implied that the Fed won't erase that warning after its next meeting, scheduled for Dec. 9.

Anthony Santomero, who is president of the Federal Reserve Bank of Philadelphia and does not sit on the rate-setting committee, said at a conference in Philadelphia that advances in computing and telecommunications are driving a revolution in productivity that keeps prices down but is bad for the job market. "This was the second 'jobless recovery,' and now holds the dubious distinction of being the first 'job loss recovery,'" he said.

He added that the Fed eventually will have to change "to a less stimulative, and then neutral, stance." But not real soon: "However, any policy adjustment need not take place in the near future, in light of significant excess capacity and benign inflation pressures." In his next breath, he said, "the current level of short-term interest rates cannot be maintained indefinitely."

That's wishy-washy, but clear: The Fed is still worried about inflation falling too low, and it won't remain worried forever.

A few days earlier, Ben Bernanke, a Fed governor and member of the rate-setting committee, spoke in Pittsburgh about the jobless recovery and said rates can remain low without sparking inflation. Fed chairman Alan Greenspan said in a speech on the same day that the Fed's rate policy "is able to be more patient."

Soon after the Fed began delivering these strong hints that short-term rates will remain steady for quite some time, long-term interest rates began falling. The 10-year Treasury yield, a barometer of mortgage rates, fell on Nov. 12 and has dropped almost every day since then (the only exception being a day when it remained steady). The 10-year yield closed at 4.49 percent on Nov. 10 and closed at 4.14 percent nine days later.