Central Banks Prepared to Act
Following a large improvement in mortgage rates and a large decline in stocks last week, investors partially reversed direction this week. The European Central Bank (ECB) and the Fed were the main focus, providing a degree of comfort, and investors were a little more willing to take on risky assets. This was negative for bonds, however, and mortgage rates ended the week modestly above last week's record low levels.
The high degree of uncertainty about the troubles in Europe and the pace of US and global economic growth remains a major influence on US mortgage rates. In general, the uncertainty causes investors to reduce risk, which supports low rates. In addition, it tends to produce a higher level of volatility, which was evident this week. Reports about potential actions by the ECB, the IMF, China, Greece, and Spanish banks all produced significant reactions, even though little of the news could be supported as more than speculation. There will be series of major events later in the month, including Greek elections, an EU summit, and a Fed meeting, so it is reasonable to expect that volatility will continue.
Highly anticipated statements from the President of the European Central Bank (ECB) and from Fed Chief Bernanke this week helped ease investor concerns a little. Neither the ECB nor the Fed is ready to provide additional stimulus right now, but they are open to further action if necessary. The ECB and the Fed have already taken extraordinary measures to ease the financial crisis. The leaders of both central banks pointed out that monetary policy alone will not be enough to solve all the problems. They suggested that decisive action by political leaders would be more effective than further central bank action at this point.
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