Federal Reserve tapers asset purchases

The central bank has been buying Treasuries and mortgage-backed securities since March 2020

It’s official. The Federal Reserve announced Wednesday that it will soon begin to taper its monthly asset purchases.

The central bank’s Federal Open Markets Committee said Wednesday that thanks to “substantial further progress” the economy has made, it will reduce the pace of its $120 billion in monthly purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.

That means that later this month, the Federal Reserve will purchase at least $70 billion Treasury securities and at least $35 billion agency mortgage-backed securities. The Federal Reserve Bank of New York has been buying the mortgage-backed and Treasury securities since March 2020, when Federal Reserve Chairman Jerome Powell announced the move in response to the coronavirus pandemic.

In its prepared statement, the FOMC said that it expects to make similar reductions each month, but that will depend to some extent on changes in the economic outlook.

“The path of the economy continues to depend on the course of the virus,” the central bank said. “Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain.”

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The Federal Reserve has been signaling its intent to reduce asset purchases for some time. The monthly purchases have helped to keep the cost of financing low and, consequently, most economists expect rates to continue to rise.

The Mortgage Bankers Association said that the asset-purchase tapering would not impact the trade group’s latest forecast for mortgage rates and mortgage originations. It expects the rate for 30-year fixed-rate mortgages to increase from 3.2% today to about 4% by the end of 2022.

Fannie Mae also expects rates for the 30-year fixed-rate mortgage to rise. The mortgage behemoth predicted rates will average 3.3% in 2022, largely because of the Fed’s tapering asset purchases.

The MBA’s chief economist, Mike Fratantoni, said that the Federal Reserve’s tapering announcement was in line with market expectations.

“The statement continues to signal that they will wait to increase short-term rates until the economy has reached full employment,” Fratantoni said. He added that the MBA expects the economy will be at full employment by the middle of next year.

Fratantoni said he believes higher inflation is likely to persist, at least in part because of the rising cost of shelter. Rental costs and the consumption value of owner-occupied housing, in addition to other forms of lodging such as hotels, account for nearly a third of the Consumer Price Index.

That means home-price growth and rental growth will contribute to faster growth of inflation, Fratantoni explained.

“This trend is one reason why we believe that higher inflation is likely to persist,” Fratantoni said. “Shelter prices continue to face upward pressures because of the lack of for-sale inventory and decreasing vacancy rates for apartments.”

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