Mortgage Charges Close to Lengthy-Time period Lows Regardless of Taper Discuss
“Taper Talk” refers to comments, speeches, or official political communications from the Federal Reserve (also known as “the Fed”) addressing when and how the Fed will reduce its bond-buying activity. Impressive! What a boring and potentially confusing phrase! Let us try again…
The Fed is buying bonds– US government bonds and mortgage-backed bonds (which in turn serve as the basis for pricing mortgage rates). This helps move interest rates or stay low. If markets assume the Fed will stop buying bonds, there is a risk that interest rates will rise.
The current bond purchases began in response to the pandemic. They helped stabilize the financial system and provided “shelter” (a boost to macroeconomic activity that should support the Fed’s inflation and job growth goals). As the pandemic became more manageable and, in particular, the economy was back online, the Fed increasingly discussed whether to wind down (or “shorten”) the bond purchase programs.
That The same thing happened in 2013, just the market was much more surprised through the taper conversation. This time around, the market knew the throttling would be a natural milestone in the post-pandemic economic recovery. Even so, timing does matter quite a bit when we speak of guaranteed bond market demand of $ 120 billion per month.
At the risk of telling the obvious when the market goes believes the Fed will decline sooner or in larger steps; all things being equal, this would put upward pressure on interest rates. Conversely, interest rates can stay low or even fall if the market sees the Fed slowly adopting things.
The latter is essentially in a nutshell this week. While the Fed actually added a few vague references to rejuvenation in the Policy Statement, and while Powell wasn’t shy about acknowledging the ongoing conversation, the markets were already expecting it. In the same breath as that confirmation, Powell also made it clear that the economy is still “some way” away from the level of progress necessary to actually pull the trigger for reduction. While some economists thought we would see such a trigger as early as September, Powell suggested that the discussion would last at least two more Fed meetings. That postpones an announcement to November at the earliest – possibly later – with the tapering likely not to begin until early 2022.
In addition to this slower decision-making process, Powell also looked at Mortgage Back Securities (MBS). special. He admitted that several committee members wanted to reduce MBS before Treasuries, but that they were the minority. At worst, it sounds like the Fed may be considering cutting MBS and Treasuries at different rates – still a win compared to an “MBS first” scenario.
All of this has enabled the bond market, and therefore mortgage rates, to remain at their strongest levels in recent times. For the average lender, this means top-notch conventional 30-year fixed rates in the upper 2-range.