Fed says rates stay low at least through mid-2013

[Chris Martin]

In recent history, I can't remember when the FOMC came right out with a target date that was so far out (2 years). In the FOMC statement they say "The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

Sounds like borrowing rates will stay low for the 'foreseeable future' which is good news for borrowers. The main concern I had was with the cost and terms of commercial loans... with this announcement, lenders now should have a better sense of intermediate term rate direction and possibly we'll probably see increased loan activity as a result. Agree?

[Scott Hubbard]

Originally posted by Bryan Hancock:

In my simple mind I think that certainty of rate direction is trumped by the certainty of rates staying so low. What lender wants to lend when they can get no spread and can get better (and safer?) yield investing funds with the gov-mint? Can you say crowding out?!

Maybe that is off base...I'm not a banker. If my job is to lend money I wouldn't want to lend it at 4% with the strong likelihood of inflation ticking far north in the near future. That is...unless my adjustment on my notes is very near term and happens quickly.

Since the fed funds rate is near zero, the spread between 4% and zero is very good historically speaking. However, risk remains very high due to an unstable real estate market so the spread on a risk adjusted basis is very unattractive. Why write a 30 year mortgage at 4% when you can issue a credit card at 15%?

in addition, there is a large disconnect due to a lack of demand for RMBS. No liquidity means tighter lending restrictions. Once liquidity returns, loan qualifications will loosen. i just hope it happens soon.