What HSH.com thinks the Fed will doby Keith Gumbinger
Will the Federal Reserve decide to taper their Quantitative Easing program on Wednesday or won’t they? If so, how soon, and how quickly or slowly will they reduce purchases? Ultimately, what does it mean for the housing market, including sales and prices?
These are the questions we’ve been asked and have been asking since way back in late May, when Federal Reserve Chairman Ben Bernanke first intimated that there would be an end to the Fed’s extraordinary QE policies.
We may get some, none or even all of those answers as soon as Wednesday, when the Federal Reserve’s policy setting committee meeting comes to a close. To the questions above, we’d add perhaps one:
What does it mean if they choose to do nothing, at least for now?
To be honest, it’s hard to know with any precision what the Fed thinks of the current situation or what it might decide to do. We can only look at the economic evidence available and try to apply it logically.
One thing is for sure, mortgage rates are a whole lot higher now than when Mr. Bernanke first revealed that QEIII might be finite, after all.
What we think the Fed will do
It seems to us that the Fed’s most likely course will be to announce that a tapering process has begun.
Most likely, and given that the economy is doing OK but not great, the first taper will be a “toe-in-the-water” of $5 billion or so, and a message that additional tapering will fully depend upon incoming data which supports further reductions in support.
If the financial markets don’t convulse over the change, and if the economic data retains a warmish tenor over the intervening six-week period, than the next meeting might see another taper of perhaps $10 billion.
That would be late October, and there’s a lot which could happen between now and then.
What will happen…
If the general announcement comes as we expect it to, there should be little to no change in mortgage rates as a direct result of the Fed’s move.
How they characterize the potential for future moves will matter much more in that regard.
What if the Fed does nothing?
Markets may interpret this as a signal that the economy is falling short of the Fed’s expectations, and that it is somewhat weaker and more in need of continuing support than not. If this turns out to be the case, mortgage rates would probably decline modestly, at least for a time, but would tend to firm up again as we approach the next Fed meeting, and so on.