WASHINGTON
Mortgage rates tumbled to historic lows yesterday after the Federal Reserve's sudden decision to print $1.2 trillion and pump it into the economy, a move that also triggered warning signs of inflation -- a weaker dollar and the highest oil prices of the year.
The national average rate on a 30-year, fixed-rate mortgage fell to 4.94 percent, down nearly a quarter of a percentage point from a day earlier, according to financial publisher HSH Associates.
It was the first time that the average had fallen below 5 percent since the publisher began keeping records in 1979. But mortgages were not exactly being passed out freely. Lenders remain extremely strict about who qualifies.
"The real story here is that the low rates are available only to solid-gold borrowers," said Don Fader, a North Carolina mortgage broker who was quoting a rate just above 4.6 percent for mortgages.
The Fed announced Wednesday that it would buy $750 billion in mortgage-backed securities and $300 billion in Treasury debt. It also will double its purchases of debt issued by Fannie Mae and Freddie Mac to $200 billion.
Because spending that kind of money requires the Fed essentially to print money, it meant risking inflation -- and yesterday there were early indicators that was exactly what was happening.
It cost more than $1.36 to buy a euro, more than 2 cents higher than the previous day -- an unusually large leap. And the British pound gained 3 cents against the dollar, which fell sharply against the Japanese yen.
The jump in oil prices was even more dramatic. The price of a barrel of crude oil went up nearly $3.50, or 7 percent, on the New York Mercantile Exchange, to its highest level since early December.
That doesn't mean that inflation is a sure thing. In fact, most economists think that high unemployment and sluggish consumer spending will keep inflation in check as businesses hold down prices in order to maintain sales.
And given the poor shape of the economy, the Fed made clear that -- for now -- it isn't worried about inflation. It's more concerned about falling prices, or deflation. The country's last serious bout of deflation came in the 1930s.
The move was notable for its immediacy. Seemingly at the flick of a switch, the Fed was able to train a $1.2 trillion fire hose on the economy -- a sharp contrast to the slower, messier wrangling in Congress over the $787 billion stimulus plan. "While Washington watches the economy burn, the Fed is fighting the financial fires," said Ethan Harris, an economist at Barclays Capital.
By snapping up Treasury securities, the Fed boosts their prices, and that drives down the yield, or interest rate. The 10-year Treasury bond dropped by the biggest one-day amount since 1981 on Wednesday. It rebounded slightly yesterday.
The deepening recession, now in its second year, is shuttering banks and other businesses and driving up home foreclosures. It has left 12.5 million people looking for work and sent unemployment to a 25-year high.
The convergence of housing, credit and financial crises -- the worst since the 1930s -- has clobbered the economy. By pumping $1.2 trillion into the economy, the Fed hopes to spur lending and get Americans spending again.
And even if the dollar loses value over the short term, it could bounce back once the economy starts to recover, said Jay Bryson, a global economist at Wachovia.
Buying government bonds and expanding purchases of mortgage-backed securities and debt from Fannie Mae and Freddie Mac will swell the Fed's balance sheet. It has already grown to more than $2 trillion, more than double what it was last year, and some economists say it could reach $5 trillion.
Once the economy appears back on firm footing, Chairman Ben Bernanke has said, the Fed is prepared to pull the extra money out by boosting its key short-term interest rate and ending various loan and debt-buying programs.
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