As I noted a couple weeks back, the Federal Reserve will be conjuring money out of thin air to buy “large quantities” (their words) of mortgage-backed securities. The mere anticipation of this flood of freshly-printed cash into the mortgage market has been enough to increase the demand for mortgages and thus lower rates.

The accompanying graph shows that 30-year fixed mortgage rates, depicted in blue, have dropped to a level not seen in years. As a matter of fact, fixed mortgage rates have not been this low for three decades.

Note that the Fed has not actually begun purchasing mortgages just yet, though it is set to begin doing so this month. The drop in rates appears to have taken place just in anticipation of the Fed’s artificial goosing of demand.

The Fed intends to have purchased $500 billion worth of mortgage-backed securities by mid-2009. So once they really get going, they may push mortgage rates lower still.

— RICH TOSCANO

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