May 27, 2018

Fed May Announce Bond Tapering This Week

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Fed May Announce Bond Tapering This Week

The Federal Reserve is expected to announce a tapering of its bond purchase program Wednesday, which could have a big impact on mortgage rates.

The Fed has been purchasing $85 billion per month in long-term U.S. Treasuries and mortgage-backed bonds in a move known as "quantitative easing." The bond-purchase program has helped to keep mortgage rates at or near record lows in recent years. 

On Wednesday, the Fed is to provide clear indication of when it will start scaling back on its bond purchases and by how much. 

Nearly 90 percent of 44 economists recently surveyed by USA Today expect the Fed to be cautious at first with its tapering, likely reducing asset purchases by $15 billion or less. 

“When the Fed starts to taper, it will only be taking its foot off the accelerator; it will not be stepping on the brake,” says Gary Thayer, chief macro strategist at Wells Fargo Advisors.

However, if the Fed cuts back by more—say, by $20 billion to $25 billion—markets would probably drop on fears of higher borrowing costs.  "Stocks could suffer that 10 percent correction on fears housing would get hit, consumers would retrench and the growth outlook would turn negative," says Jeff Kleintop, chief market strategist at LPL Financial.

Mortgage rates have been steadily increasing since May when the Fed indicated it would likely taper its bond purchasing program in September. Long-term mortgage rates have risen by more than a full percentage point since May. As of Thursday, 30-year fixed-rate mortgages averaged 4.57 percent, Freddie Mac reports. A year ago at this time, 30-year rates averaged near all-time lows of 3.55 percent. 

Source: “As Fed 'taper' looms, so do market surprises?” USA Today (Sept. 15, 2013) and “Investors Brace for Clarity on Fed’s Taper,” CNNMoney (Sept. 15, 2013)

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