Fed tapers, mortgage rates could still dropby Marcie Geffner
The Federal Open Market Committee (FOMC), a function of the Federal Reserve, opted Wednesday to further scale back its pace of their purchasing program known as Quantitative Easing (QE).
Specifically, the Fed intends to cut its purchases of agency mortgage-backed securities from $35 billion to $30 billion per month and reduce its purchases of longer-term Treasury securities from $40 billion to $35 billion per month, starting in February.
The Fed plans to continue to taper its purchases “in further measured steps” if such action is warranted by labor market conditions and the inflation rate; however, neither the asset purchases nor the taper is on “a preset course,” the FOMC statement said.
QE should keep downward pressure on longer-term interest rates, such as mortgage markets, promote a stronger economic recovery and help to ensure that inflation stays consistent with the Fed’s dual mandate to fight inflation and foster employment, the Fed indicated.
The federal funds rate will stay at zero to 0.25 percent, where it has been for several years. That level will continue at least until the national unemployment rate drops below 6.5 percent.
The FOMC statement included repeated assurances that the FOMC will continue to monitor economic indicators, inflation, unemployment and other factors.
Lower mortgage rates
Mortgage rates have been on a downward path so far this year despite the Fed’s taper, which many analysts feared would cause rates to rise.
HSH.com Vice President Keith Gumbinger attributed the lower rates to the weak December jobs report and additional economic worries such as slowing growth in China, which affects global trade.
This type of data should prompt the Fed to take a “cautious and data-driven” approach to the taper as Janet Yellen takes over the Fed chairmanship from Ben Bernanke, Gumbinger said.
“The Fed’s QE program certainly provided key and needed support for the housing markets, fostering sales, firming prices and reducing the number of underwater homeowners,” he added. “However, the economy may no longer need as much of this unusual support. Aside from refinancing, the housing market has done fairly well in the last half of 2013, even with mortgage rates a full percentage point or more above last May’s lows.”