One reason we believe ultra-low mortgage rates are history is that the Federal Reserve is doing more, but it's getting less results.

Here's what we mean: Back when the housing bubble burst and the stock market crashed, all the Fed had to initially do was to assure markets that it would intervene with more money and low interest rates. Words alone were enough to placate.

Since then, the Fed has had to ramp up both rhetoric and action. In 2008, the Fed implemented QE1, which centered on buying $600 worth of mortgage-backed securities. In 2010, the Fed followed up with QE2, buying $600 worth of U.S. Treasury securities.

QE1 and QE2 were followed by QE3 in late 2012. QE3 featured the Fed committing to buy $85-billion worth of MBS and Treasury securities each month for an indefinite period of time.

Each successive action has had less impact on the margin, which is why we say the Fed is having to do more just to stand pat. This should be expected, because diminishing marginal returns are the norm. Here's a drinking analogy: Each successive glass of water has less impact quenching thirst, and then a point is reached where the next glass does more harm than good.

Now we hear chatter that the Fed is pulling back from QE3 – known as “tapering” in media circles. Should that occur, interest rates will rise. The odds of that occurring sooner than later is higher today than it was a year ago. After all, the Fed will reach a point where the next purchase of a mortgage-backed security will produce more harm than good. .

Courtesy of Jessica Regan.

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