According to a statement provided by the Federal Open Market Committee of the Federal Reserve, the committee has approved another reduction of the Fed’s monthly asset purchases.
The adjustment will be made in February and cuts monthly purchases of mortgage backed securities from $35 billion to $30 billion and monthly purchases of Treasury securities from $40 billion to $35 billion.
FOMC began reducing its asset purchase under its quantitative easing program in January, when the monthly purchases of mortgage-backed securities and Treasury securities was reduced from $85 billion per month to $75 billion.
Citing its goals of maximum employment and price stability, the FOMC said that it has seen consistent improvement in the economy and specifically mentioned a lower, but still elevated unemployment rate. The statement also indicated that the FOMC expected labor markets to improve.
FOMC Asset Purchases: How They Impact Mortgage Rates
The Fed initiated the QE program in an effort to control rising long-term interest rates, which include mortgage rates. Yesterday, the FOMC statement said that Fed expects its purchases of longer-term assets will continue to control long-term interest rates and mortgage rates while supporting mortgage markets.
FOMC’s statement reported that it sees the risks to its economic outlook and the labor market as having become nearly balanced. The FOMC is still looking for inflation to reach its 2.00 percent goal.
Fed Monetary Policy To Remain “Highly Accommodative”
The Fed intends to maintain a highly accommodative stance on monetary policy after the QE asset purchases end and the economy is significantly stronger. The current Federal Funds Rate of between 0.00 and 0.250 percent will be maintained at least until the national unemployment rate drops below 6.50 percent.
FOMC members reaffirmed their commitment to monitoring economic indicators as part of any decision to alter current QE measures or the Federal Funds Rate.
Indicators Mentioned In The FOMC Statement Include:
- Additional indicators of labor market conditions
- Inflationary pressures and expectations
- Readings on financial developments
FOMC statements have consistently included the committee’s assertion that no arbitrary benchmark alone will be sufficient for the committee to change either QE asset purchases or the Federal Funds Rate.
FOMC stated that it will seek a “balanced approach consistent with its longer-run goals of maximum employment and inflation at two percent.”
Although fears of tapering the Fed’s monthly asset purchases may persist, it appears that each FOMC decision to reduce asset purchases under the QE program indicates economic growth.
Housing Starts exceeded expectations and also beat October’s reading of 889,000. November housing starts were posted at 1.09 million against a consensus of 963,000.
This reading is more in line with the NAHB/Wells Fargo Home builder Market Index, which reached a four month high with December’s reading.
With that threat resolved and a new federal budget passed, builders can now proceed without worrying about setbacks caused by government shutdowns and legislative gridlock.
Building permits issued in November were slightly lower at 1.01 million than October’s reading of 1.04 million. Viewed as an indicator of future construction, and ultimately, available homes, it is not unusual for construction and permits to slow during the winter months.
FOMC Statement And Chairman Bernanke’s Last Press Conference
Throughout 2013, strong signs of economic recovery have led to predictions of the Federal Reserve tapering its quantitative easing program.
As each FOMC meeting approached, analysts predicted that the Fed would start reducing its $85 billion purchases of Treasury and mortgage-backed securities.
The asset purchases are part of the government’s quantitative easing program that was implemented to keep long-term interest rates and mortgage rates low.
The cut finally came on Wednesday as the FOMC made its customary post-meeting statement. Effective in January 2014, the Fed will reduce its monthly purchases by $10 billion.
The QE purchase will be split between $40 billion in Treasury securities and $35 billion in MBS. The Fed expects that the economy will continue recovering at a moderate pace.
The FOMC statement noted that the Fed will continue monitoring inflation, which remains below the Fed’s target rate of 2.00 percent, and the national unemployment rate, which remains above the Fed’s target rate of 6.50 percent.
The statement noted that asset purchases are not on a predetermined course, and that the Fed will continue to closely monitor labor market conditions, inflation pressure and economic developments in the U.S. and globally.
The Fed did not change its target federal funds rate of 0.00 to 0.25 percent, and would not do so at least until unemployment falls to 6.50 percent. Changes to policy accommodation are made with the Fed’s dual goal of achieving an inflation rate of 2.00 percent and achieving maximum national employment goals.
Bernanke Press Conference
Mr. Bernanke repeated key points of the FOMC statement, and noted that “highly accommodative monetary policy and waning fiscal drag” is helping with the economic recovery, but that the economy has much farther to go before it can be considered fully recovered.
Mr. Bernanke said that FOMC members saw the unemployment rate dropping from 7.00 percent in November 2013 to 6.30 to 6.60 percent in the fourth quarter of 2014. Improving labor markets and rising household spending were cited as signs of economic recovery.
Mr. Bernanke mentioned concerns about the high unemployment and underemployment rates and said that the Fed’s benchmarks for unemployment and inflation would not automatically trigger reductions in its QE asset purchases.
He also said that the committee did not expect to adjust the target federal funds rate immediately after the national unemployment rate reaches 6.50 percent.
Mr. Bernanke repeated that the Fed’s actions regarding monetary policy and QE would be dependent on in-depth review of ongoing financial and economic developments, but said that further tapering of QE purchases is likely if the economy stays on its present course of moderate improvement.
The minutes of last month’s Federal Open Market Committee (FOMC) meeting show significant support for tapering the Fed’s current amount of monthly securities purchases. These purchases, known as quantitative easing (QE), are an effort to maintain lower long-term interest rates including mortgage rates.
The Fed has been buying $85 billion per month in Treasury securities and mortgage-backed securities (MBS).
Ben Bernanke, chairman of the Federal Reserve and FOMC has hinted at “tapering” the Fed’s securities purchases by year-end in recent statements. The FOMC minutes released Wednesday further suggest that tapering based on strengthening economic trends is likely.
FOMC Members Express Mixed Views
The minutes for the last FOMC meeting, which took place on July 30 and 31, 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.
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.
The minutes for July’s meeting reflected this sentiment and noted “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.”
On the other side of the issue, the minutes note that a few members said that “It might soon be time to slow somewhat the pace of purchases as outlined in the QE plan.”
QE Tapering Not The Only Influence On Mortgage Rates
The Fed is likely to monitor its words as well as economic conditions, as previous announcements about tapering QE made by Chairman Bernanke and FOMC have created havoc in world financial markets.
In relation to mortgage rates, it’s likely that tapering QE purchases will cause mortgage rates to rise. Demand for bonds will fall as the Fed reduces its purchases, falling bond prices usually cause mortgage rates to rise.
It’s important to keep in mind that tapering QE securities purchases is only one among many things that can impact financial markets, mortgage rates and the economy.
While the Fed is expected to begin tapering its securities purchases as soon as September, developing economic news throughout the world can potentially impact mortgage rates and could cause the Fed to revise its timeline for tapering the volume of its securities purchases.
There was potentially good news for mortgage rates on Wednesday as the Fed’s Federal Open Market Committee (FOMC) announced that its quantitative easing (QE) program would remain unchanged for the present.
Economists expect the Fed to begin tapering the amount of QE toward the end of the year in accordance with Chairman Ben Bernanke’s previous statements that “tapering” would likely begin near year-end.
No specific date for reducing the QE assets purchases was given.
Chairman Bernanke has previously indicated that the Fed will closely review domestic and global economic developments as part of its decision-making process for changing the QE program. Wednesday’s FOMC statement reaffirmed this plan.
Fed Cites Economic Expansion and Improving Labor Conditions
The FOMC statement cited modest economic expansion, improving labor markets and continued high unemployment levels as a basis for continuing its current level of QE.
The Fed’s mandate requires it to support price stability and low unemployment; reversals in these or other economic areas could cause the Fed to continue its QE at present levels. At present, economists expect QE to end in mid-2014.
The FOMC statement also indicated that the target federal funds rate will remain between 0.00 and 0.25 percent at least until the national unemployment rate falls to 6.50 percent. Chairman Bernanke did not give a press conference after Wednesday’s statement was released.
Quantitative Easing: Monthly Purchase of MBS, Treasury Securities Intended to Control Mortgage Rates
The Fed currently purchases $40 billion in mortgage-backed securities (MBS) and $45 billion in Treasury securities monthly. These purchases are intended to control long-term interest rates including mortgage rates.
When the Fed begins tapering and eventually concludes these asset purchases, demand for MBS and Treasury securities are expected to fall and their prices will likely fall as well. When prices for bonds include MBS fall, mortgage rates traditionally rise.
With mortgage rates recently moving up, reducing the level of the Fed’s QE asset purchases is cause for concern. Higher mortgage rates make homes less affordable; the combination of rising home prices and mortgage rates presents challenges for first-time home buyers and others without sufficient funds for meeting higher down payments and monthly mortgage payments.
Now would be a very good time to ask your trusted real estate professional for a personal review of your home financing situation. Give them a call and ask for your private assessment today.
FOMC Minutes Suggest QE Tapering by Year-End
The minutes for June’s meeting of the Federal Open Market Committee (FOMC) suggest that committee members are mostly in agreement that the current quantitative easing program (QE) should begin winding down by year end, but the committee minutes are very clear concerning the committee’s intention to monitor inflation and ongoing economic and financial developments before taking action to reduce the current rate of QE.
The Fed currently purchases $85 billion monthly in Treasury securities and mortgage-backed securities (MBS). Investors fear that if the Fed rolls back QE too soon or too fast, it could cause long term interest rates such as mortgage rates to rise faster.
The Fed minutes indicate that factors the Fed will continue monitoring before making changes to QE include:
- Labor market conditions
- Indicators of inflationary pressures
- Readings on financial developments
FOMC members also agreed that the Fed would not sell MBS it has accumulated after the economic support program ceases. When the Fed ceases QE, demand for mortgage-backed securities is expected to fall. If the Fed were to sell off MBS holdings in addition to stopping QE, MBS prices could fall sharply. In general, when MBS prices fall, mortgage rates rise.
The FOMC minutes indicate that the Fed intends to maintain the Federal Funds rate at 0.000 to 0.250 percent “for a considerable time after the monthly asset purchases cease.” To be clear, the minutes do not reveal any specific dates for starting to wind down the program.
Concerns over financial conditions in Europe highlight the Fed’s intention to monitor global economic developments were discussed. Potential “spillover” of negative sentiments in response to Europe’s economic woes to U.S. financial markets were seen as a potential threat to the U.S. economic recovery.
Committee members found that although the economy showed moderate improvement since its last meeting, the national unemployment rate remains high at 7.60 percent. Members also noted that the numbers of long-term unemployed and those working part time jobs but wanting full time jobs remain higher than average. These conditions traditionally keep consumers from buying homes.
Housing: Upside-Down Mortgages Decreasing
Due to rapid increases in home values, the committee noted that fewer homeowners were under water on their mortgage loans. This is good news as homeowners can rebuild household wealth as their home equity increases. Having home equity also provides homeowners with the flexibility to sell or refinance their homes.
While housing is driving the economic recovery, high unemployment will likely keep the Fed from changing its QE policy in the short term.
Now may be a very good time to take advantage of still historically low mortgage interest rates before they rise. If you have specific questions on purchasing or refinancing your home mortgage loan and how these changes may affect you, please contact your trusted real estate professional today.
Minutes of the April/May Federal Open Market Committee (FOMC) recently released may have a significant impact on mortgage rates going forward. One significant development from the meeting suggests that the present quantitative easing (QE) program may be modified in the near future.
The current QE program involves the Fed purchasing $85 billion per month in mortgage backed securities (MBS) and Treasury bonds. The Fed’s goal with QE is keeping long-term interest rates, including mortgage rates, low.
Considerations mentioned in favor of slowing the current QE program include concerns over “buoyant” financial markets as evidence of a developing economic “bubble”. FOMC members in favor of continuing the current easing program cited fears of economic deflation resulting from cutbacks in QE.
Fed Chief Calls Current Bond Buying Program “Overheated”
In related news, Fed chairman Ben Bernanke, in testimony before Congress, characterized the current QE program as “overheating the economy,” but he also stated that slowing economic growth is a worse alternative than continuing the current QE program. Chairman Bernanke noted that QE is supporting financial markets and the economy and indicated that it is not time to reduce the Fed’s support.
Diverse opinions within the FOMC added to the impasse over QE, as one member advocated for immediate tapering of the QE program, while another proposed expanding QE purchases.
The FOMC noted a number of challenges including the national unemployment rate of 7.60 percent at the end of March, that private sector hiring plans were “subdued,” and that jobless claims had trended up during the inter-meeting period. Among numerous economic positive statistics cited, the Fed noted that consumer spending improved and was driven by higher automotive sales and a drop in fuel prices.
The FOMC minutes reflect that some members had concerns about the ability of consumer spending to hold without notable improvement in hiring and business investment. Businesses contacts of FOMC members were reluctant to plan additional hiring and investing in their businesses based on reports of decreased manufacturing and lower international demand for products.
Good News Revealed About Low Future Inflation Expectations
The Fed predicted modest inflation over the medium term, and expected inflation to remain subdued until 2015. The Fed will maintain its benchmarks for adjusting the Federal Funds Rate and QE based on the national unemployment rate reaching 6.50 percent and the inflation rate reaching 2.00 percent.
The FOMC characterized the improving housing market as responsible for economic improvements for related businesses, but also acknowledged that increasing demand for housing was being caused by low inventories of available homes rather than buyer enthusiasm alone.
Improving home prices and easier consumer credit terms were viewed as contributing to improvement in overall economic conditions. These factors increase household cash flow and provide consumers with more discretionary income for spending.
While the FOMC members did not agree on how or if to revise their current QE policy, it seems likely that the next meeting will bring increased scrutiny of QE and its impact on current economic conditions.