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Fed decides against boosting efforts to cut mortgage rates

The Federal Reserve signaled that it won't try to do more than it previously planned to pull down mortgage rates and other long-term interest rates.

That has caused some mild disappointment in the Treasury bond market today, pushing up longer-term yields. The 10-year T-note yield, a benchmark for mortgages, was at 3.70% at about 1:15 p.m. PDT, up from 3.63% on Tuesday.

For homeowners hoping to refinance at a lower interest rate, the Fed didn’t offer any fresh encouragement.

In their statement after finishing a two-day meeting, Fed Chairman Ben S. Bernanke and cohorts sounded a bit more upbeat about the economic outlook, saying that information received since their last meeting in April "suggests that the pace of economic contraction is slowing."

Bernanke Still, they reiterated that they expected to keep their key short-term interest rate at "exceptionally low" levels "for an extended period." The Fed’s target for the rate now is between zero and 0.25%.

Nobody expected the Fed to make a change in its short-term rate. But some on Wall Street had hoped that the central bank would boost the $1.75 trillion it plans to spend to buy mortgage-backed bonds and Treasury securities for its own portfolio this year.

The Fed’s purchases, which began earlier this year, were aimed at keeping a lid on long-term bond yields and mortgage rates. But those rates have risen anyway, in part because of the Treasury’s unprecedented borrowing to fund rescue programs for the economy and the financial system.

Some bond investors also have been spooked by the Fed’s moves to pump massive sums into the financial system. The fear is that all that money will eventually fuel rising inflation, brutalizing fixed-rate bonds.

The 10-year T-note yield jumped as high as 4% two weeks ago from a record low of 2% at the end of December.

The average 30-year mortgage rate rose from 4.78% in early April to 5.38% as of last week, according to Freddie Mac. That has crushed refinancing activity.

Bernanke may have decided there was too much risk in trying to boost efforts to push long-term rates down, with the market leaning in the other direction. Besides, the Fed has said it views rising long-term rates as a sign that the economy is getting better.

"The Fed is not going to take further action, like ramping up asset purchases, to forestall rising long-term interest rates at this time," said Scott Anderson, senior economist at Wells Fargo & Co. "They see the rate increases so far as a return to normalcy, the taking out of the depression scenario, so to speak."

Policymakers also may be figuring that long-term Treasury yields aren’t likely to go much higher, anyway. When the 10-year T-note yield hit 4% on June 10, buyers rushed in and the yield fell back.

For now, the Fed appears content to let the market find its own levels on long rates, said George Goncalves, a bond strategist at Cantor Fitzgerald.

Could mortgage rates dive again? Sure -- if the economy crumbles.

As Scott Simon, a bond portfolio manager at Pimco in Newport Beach put it: "Be careful what you ask for."

-- Tom Petruno

Photo: Fed Chairman Ben S. Bernanke. Credit: Carol T. Powers / Bloomberg News

 
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