The Fed wants to keep mortgage rates low and it seems ready to do whatever it takes to accomplish its goal, including printing billions of dollars to become the king of mortgages.
The Fed said on Thursday that it will spend $40 billion per month to buy mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Yes, this is the long awaited QE3. But unlike with the two previous versions of bond-buying programs -- QE1 and QE2 -- the Fed didn't say when the buying spree will end. It says it will buy mortgages until it's time to stop.
The central bank already owns about $843 billion in mortgage-backed securities and it says will continue to reinvest any maturing mortgage bonds. Through reinvestment and new purchases, the Fed will increase its longer-term securities by $85 billion per month. Most of that money will go toward the purchase of mortgages.
What does this mean for mortgage rates?
The Fed's latest act of desperation should, in theory, keep mortgage rates low. But will it?
When the Fed announced QE2 in November 2010, rates spiked unexpectedly. When the Fed ended the $600 billion bond-buying program in mid-2011, rates tumbled.
So far, so good
It's been a few hours since the Fed hit the panic button and the required net yield on Freddie Mac bonds tumbled to 2.41 percent from 2.62 percent. This is the lowest the Freddie yield has reached since Bankrate started tracking rates in 1985. Normally, mortgage rates follow the direction of mortgage bonds. That means you should expect to see some of the lowest mortgage rates in history in coming days. Yes, lower than all the record lows you've seen so far.
But remember, rates don't always follow logic.
Before refinancers celebrate, here is a warning: There is a risk that rates will increase slightly in the short term because of the dose of optimism the Fed injected into the markets, says Paul Edelstein, director of financial economics at HIS Global Insight.
"As money flows from bonds into stock, I can see how rates may increase" in the short-term, Edelstein says. But over time, the Fed will accomplish its goal and rates will stay low, he says.
So let's start the bets.
How low do you think rates will go?
Follow me on Twitter @Polyanad.