Fed to Ease Out of Efforts to Keep Rates Low

At the conclusion of its September meeting on Wednesday, the Fed announced that it will extend its remaining purchases of $1.45 trillion in mortgage-related debt through March 2010 instead of concluding the program in December 2009. With about two-thirds of the scheduled purchases completed, the change will reduce the amount of the remaining monthly purchases and help keep mortgage and other interest rates low through the end of the first quarter of next year.

"Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn," the Fed said in an statement released after the meeting. "Conditions in financial markets have improved further, and activity in the housing sector has increased."

The statement went on to note that household spending and business activity also show signs of improvement, but predicted that the economy will remain weak for some time. It predicted that inflationary pressures will remain subdued for an extended period due to the overall weakness of the economy.

Home sales, unemployment filings down

Ironically, the Fed's statement was followed by a report Thursday morning that existing home sales fell 2.7 percent in August, according to figures from the National Association of Realtors, reversing a strong increase the month before. The drop came despite continued low mortgage interest rates and an $8,000 first-time homebuyer tax credit that has been generally credited with boosting sales. Home sales remained 3.4 percent ahead of their August 2008 level, however.

At the same time, the Labor Department reported today that initial jobless claims fell again last week, to their lowest level in two months. A total of 530,000 people filed first-time applications for unemployment benefits, down from 551,000 the week before. The total number of people receiving unemployment also fell slightly, to 6.14 million.

Fed wrapping up credit stimulus program

The Fed's announcement of the extension of purchases of mortgage-related debt marks its exit plan from a program that dramatically drove down mortgage interest rates and led to a flood of mortgage refinancings after it was announced last March. According to the Mortgage Bankers Association, interest rates on 30-year fixed rate mortgages fell to 4.61 percent, the lowest rate in at least half a century, within weeks of the Fed announcing the purchase program.

The Fed is currently scheduled to complete purchases on $1.25 trillion in mortgage-backed securities and $200 billion in agency debt by the end of March. Another $300 billion in purchases of Treasury securities are due to be completed Oct. 9, as scheduled.

The Fed also left its target for the federal funds rate, the interest banks charge each other on overnight loans, unchanged at zero to one-quarter percent, and said it expects to keep it there for the foreseeable future. An increase in the rate would be an indication that the economy is picking up steam and that the Fed is growing concerned over inflationary pressures.