Fed to begin tapering “soon”
This week, Federal Reserve officials indicated they would begin tapering bond purchases “soon,” while keeping benchmark interest rates anchored near zero. Since the beginning of the pandemic, the Fed has used its zero-rate policy and asset purchase program to provide emergency support to the economy.
Asset purchases, consisting of $120 billion per month of U.S. Treasury notes and agency mortgage-backed securities, are designed to provide market liquidity and stability to an economy rattled by the COVID pandemic. Over recent months, however, the Fed has been under mounting pressure to pull back such support as economic conditions improved and inflation soared to unhealthy levels. If progress “continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” accorded to today’s statement from the Fed.
Investors keyed in on the word “soon,” taking that to mean markets could see a reduction in asset purchases starting as early as November. Most Fed-watcher’s see a total wind down of the Fed’s asset purchase program by mid-2022, paving the way for the so-called “liftoff” or the first Fed funds interest rate hike. Interest rate forecasts, as measured by Fed projections, currently indicate a 25bps hike in 2022, followed by 75bps increases in both 2023 and 2024.
With the end of Fed accommodation apparently in front of us, markets were surprisingly unfazed. Equity markets ended Wednesday in the black, snapping a four-day losing streak; the S&P and NASDAQ advanced .95% and 1.02%, respectively. To be sure, the markets viewed the Fed’s policy statement as positive, reassuring investors that the economy could stand on its own with less monetary support. Interest rate markets that affect mortgage rates were mostly unchanged, though shorter-term interest rates, more closely tied to Fed funds, did move higher in response to the revised Fed projections.
Jeremy Collett is Guaranteed Rate’s Executive Director of Capital Markets. Market Updates are designed to provide readers with a high-level yet insightful view of how economic news, events and trends affect mortgage rates and the homebuying process. This information is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Guaranteed Rate, Inc. cannot predict where rates will be in the future.
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