I know that you know that this is the former Chair of the Board of Governors, Ben Bernanke, and not the current Chair, Janet Yellen.  Ben Bernanke navigated the U.S. through the most difficult financial crisis in 80 years, and it is he who said “Monetary policy is 98% talk and 2% action”.  That idea is a good way to introduce the Fed meeting yesterday.

The Fed raised the overnight lending rate to 1.25%, an increase of 1/4%.  That will instantaneously raise the Prime Rate to 4.25%, affecting credit cards and other short-term debt instruments like car loans.  It should also raise the yield on your savings account and certificates of deposit.  The financial markets all expected this move and so the hike was already priced into long-term debt like mortgages, student loans, and the next iPhone.

Chair Yellen yesterday laid out a plan to begin to sell off the Fed’s $4.5 trillion dollars in long-term debt holdings.  For the last eight years, they have been the world’s largest buyer of Treasury Notes and Mortgage Bonds, accumulating and then reinvesting the proceeds of sold Notes (from people cashing in Treasury Bonds or refinancing their mortgages) by purchasing new Notes/Bonds at the rate of $20-30 billion per month.  That will begin to unwind once the Fed Funds Rate reaches 2.0% (presumably the first of next year).  The plan is to allow $4 billion in mortgages and $6 billion in Treasuries to roll off the books every month, and to gradually increase the amount to a combined $50B/month “if the economy evolves inline with expectations”.  Assuming that the hopes of the economy fulfilling the well-crafted statement come to fruition, it will take at least a decade to unravel the balance sheet in an orderly fashion.

After digesting the Fed Show yesterday, mortgage bonds took a slight breather and opened down by about 0.15 bps.  Overall, interest rates are still better than they have been since last fall’s presidential election.  Nationwide, the average conventional 30 year loan is at 3.91%.  My rates are better than that and my service and turn times are also hard to beat!