Mortgage Rates Rise, Despite New Federal Policy

mortgage ratesMortgage rates have been slowly climbing in recent weeks, even as the housing crisis lingers. This wasn't how it was supposed to go, according to the Federal Reserve's quantitative easing initiative. Charles Hugh Smith of our sister site,, explains why things aren't proceeding quite as planned.

Keeping interest rates low is a linchpin of the Federal Reserve's quantitative-easing policy (QE2), a $600 billion bond-buying program aimed at stimulating the economy. The basic idea is that low rates will encourage businesses to borrow and expand -- including hiring more employees -- and will boost housing sales by making mortgages cheaper for potential homebuyers.

Unfortunately for the Fed, bond yields and interest rates having been rising since it began buying Treasury bonds as part of QE2 in the fourth quarter of 2010. And they seem likely to continue rising despite the massive intervention by the Fed. Here are some of the broader factors that are working against the U.S. central bank:

1. The Fed's policies are perceived as inflationary: Charles Plosser, a member of the Fed's policymaking committee and the president of the Federal Reserve Bank of Philadelphia, has been a leading critic of the bond-buying program. Although it's intended to pump cash into the economy and keep interest rates low, Plosser argues that QE2 may backfire by stoking inflation.


For more on mortgages and related topics see these AOL Real Estate guides:

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