The Federal Reserve, led by Fed Chair Jerome Powell meets eight times a year. In their most recent meeting, last week, the Federal Reserve hinted at planning to slow down or “taper” their Quantitative Easing (QE) program, but they did not yet begin it. Their statement was, “If progress (meaning economic recovery) continues broadly as expected, the committee judges that a moderation (or taper) in the pace of asset purchases (Quantitative Easing) may soon be warranted.” Basically, they were saying that their economic recovery goals are met or close to being met and they want to slow down their QE or Bond purchase program.
The Fed has been purchasing bonds to aid the economy in the tune of about $120 Billion per month since March 15th of 2020. When there is a demand for bonds and bonds increase in price because of this higher level of demand, this pushes bond pricing higher and yields lower, ultimately causing longer term interest rates to move lower. When the Fed spoke last week and bonds digested that statement, they reacted negatively. Again, when bond prices drop interest rates go up.
When the Fed starts tapering, it could be negative at first glance. But how much will they taper and will it cause a dramatic change in rates? The Fed is expected to taper or reduce their purchases by about $15 Billion per month. At this amount, they are still going to be purchasing an enormous amount of bonds. If they were to begin this plan in December, they would end their current QE program by about mid-2022. This is still very accommodative; and they will still be aiding the bond market very much, which will help keep long term rates from getting out of hand.
We all must keep in tune with the Fed and their current plans as this is already impacting the mortgage market and most certainly will continue to in the very near future. It is important that you work with a trusted advisor who understands this and helps you work the Fed’s goals into your business plan.
Source: https://cnb.cx/3ERE0QA
By: Jon Iacono