Another hint from the Fed about possibly starting to taper quantitative easing. This will have a dramatic effect on real estate and mortgage rates…
We just got another huge hint that the Fed is going to start tapering their current program of quantitative easing. The minutes of last month’s Federal Open Market Committee meeting were released this week. Ben Bernanke, chairman of the Federal Reserve and FOMC has hinted at “tapering” the Fed’s securities purchases by year-end lately. In the minutes, we see hints that the Fed appears to be ready to start tapering the Fed’s current amount of monthly securities purchases.
These purchases, known as quantitative easing (QE), are why we have enjoyed such low long-term interest rates including mortgage rates lately. So how much has the Federal Reserve been pumping into the economy? The Fed has been buying $85 billion per month in Treasury securities and mortgage-backed securities (also called MBS). I have been talking about the possible end of QE and what it is going to mean for real estate and the economy.
But to recap, you can expect higher mortgage rates. Higher mortgage rates could slow down the real estate market. Or it could mean that buyers will have to lower the price range of the homes they are looking at since most buyers shop by payment not price.
Not Everyone Is On Board
While it appears that Bernanke is ready to start tapering QE, it also appears that not all of the FOMC members feel the same way. The minutes for the last FOMC meeting states that many members are “broadly comfortable” with tapering QE securities purchases later this year if the economy continues to improve.
At the same time, many FOMC members indicated that it “isn’t yet time” to scale back the purchases. A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases.
All along, the FOMC has emphasized that it will closely monitor domestic and global financial and economic developments as part of its decision about when tapering the QE purchases will begin. While there is no doubt the economy is improving, is it time to end QE?
Don’t get me wrong because I am no fan of quantitative easing. In some ways it appears to be yet another way of transferring more money from the American people into the hands of the big banks and Wall Street.
Quantitative Easing and Mortgage Rates
Every time the Fed has mentioned ending or tapering QE it has created havoc in world financial markets. And we have seen plenty of turmoil in the stock market lately so I hope this announcement does not create more problems.
Like I have been saying, it is very possible that tapering quantitative easing will make mortgage rates increase. The reason for this is that demand for bonds will fall when the Fed reduces its purchases. Less demand for bonds will cause their prices to drop. Falling bond prices usually cause mortgage rates to rise.
I am sure you realize that there is much more that affects mortgage rates besides the Fed. But we cannot stick our heads in the sand and ignore the signs that mortgage rates may increase soon. Especially since this could have a negative effect on the housing market and the economy.