“Those were the days, my friend, we thought they’d never end….”
As expected, The Federal Reserve (Fed) stopped the printing press putting an end to its historic 6 year quantitative easing, bond buying program Wednesday while keeping its basic guidance of a near zero Federal Funds Rate for a “considerable time.” The Fed said it was confident the US economic recovery would continue despite a global slowdown.
In case you missed it… in September 2012, the Fed announced its third round of quantitative easing (stimulus) referred to as QE3 and the buying began within a few days. This third round of easing was intended to put downward pressure on longer-term interest rates and support the mortgage markets. With lower rates, the Fed hoped to fuel more spending and eventually more hiring.
The Fed began adding $85 billion in long-term bonds to its balance sheet each month, split between Treasuries and Mortgage-Backed Securities. There was no end date to this bond buying program, which attracted plenty of criticism from the beginning.
In December 2013, after telegraphing the markets for several months of its intentions, the Federal Reserve officially announced it would start to taper its bond buying program by $10 billion a month. The Fed said it would keep a close eye on incoming economic data, but barring any significant changes to the outlook on the economy, the cuts would continue each month. And so it began. In January 2014 the Fed began tapering its asset purchases.
That brings us to the present day. Wednesday, the Fed took its monthly asset purchases down to zero, ending the program as widely anticipated. Over the course of QE, the Fed has added $1.66 trillion to its balance sheet.
When it comes to monetary policy, the Federal Reserve has two jobs, referred to as a dual mandate. It is to promote maximum employment and keep prices stable. The Fed said it sees improvement in the labor market, citing “a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.” In addition, the Fed said “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
The Fed is maintaining its accommodative stance for a “considerable time” as stated in the Policy Statement yesterday. The Fed plans to keep the Fed Funds Rate (overnight short term borrowing) at near zero. With the absence of inflation, the Fed can afford to keep the Fed Funds Rate parked for a while.
What does this mean for mortgage rates? Mortgage rates have certainly benefitted from the Feds aggressive bond buying program. Now that it has ended, the markets will likely be erratic while it looks for normalcy. With low inflation, rates are expected to remain low through 2015, although the best levels are most likely behind us.