The Fed met last week and in their statement said that the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. They will gradually slow the pace of the these purchases in order to provide a smooth transition in the markets and they expect to be done by the end of the first quarter of 2010.
This program was expected to end in December 2009, however they are extending the timeline to prevent a rapid rise in rates that an abrupt end to the program would cause. Although this will help keep rates lower for a longer period of time, don't assume that rates will stay low until the end of the first quarter.
The Fed doesn't set rates. The market watches what the Fed says and that is how it influences the market. Rates are set by raw price of mortgage backed securities and also by loan level adjustments by Fannie Mae and Freddie Mac. Jumbo prices are set by individual banks.
Because the Fed has been buying mortgage backed securities, interest rates have been artificially lowered. As the Fed exits the market and slows the purchase of the securities, interest rates will increase. Exactly how much and how fast, we don't know. Expect that rates will be back up to 6%, maybe higher within the coming months. Rates will be influenced by the "real market" and that will probably start before the Fed finishes their spending.
