As was expected the Fed announced yesterday that they would leave short-term interest rates unchanged.  They also commented, “the Committee expects that inflation will remain subdued for some time.”  As we know a lack of inflation is good for mortgage rates.

Also good for the outlook of mortgage rates was the Fed’s announcement that they would continue to purchase mortgage-backed bonds (MBSs) in the open market through the end of Q1 2010.  There had been growing speculation that the Fed may discontinue their participation in the MBS market due to positive economic signs.  However, the Fed did mention that they would not add to the $1.25 trillion commitment so we still expect mortgage rates to rise as we head into 2010.

As you can see in the chart below MBS’s have reacted positively.  We think there will be a great opportunity to lock in the next day or so.

Current outlook: near-term floating