Mortgage Rates

Mortgage Price Projected To High 4% In 2022 As Fed Tapering Plan Nears


The Federal Reserve could begin reducing its purchases of mortgage-backed securities as early as November, adding additional momentum to the market forces that have driven mortgage rates soaring in recent weeks.

The Fed has been cautious about telegraphing its intentions to avoid surprise investors and skyrocketing interest rates too quickly, as it did during the 2013 “taper tantrum”.

Minutes of the September Federal Open Market Committee’s meeting include new details on how the committee thought and how quickly it could withdraw its support on mortgages and government bonds.

At the onset of the coronavirus pandemic, the Fed began increasing its holdings of mortgage-backed securities by $ 40 billion per month and adding $ 80 billion per month to its long-term treasury holdings.

These asset purchases helped push mortgage rates to record lows as the rising demand for mortgage-backed securities meant that investors – the ultimate source of funding for most home loans – would accept lower returns.

By making borrowing cheaper, the Fed hoped to prevent an economic crash during the pandemic. But with inflation hotter now than some would like, most members of the Fed’s Monetary Policy Committee think the time will soon be to cut those buying back.

Minutes of the September Fed meeting show that if the economic recovery remains “broadly on track”, there is general consensus among committee members that “a gradual wind-down process that will be completed around the middle of next year would likely be appropriate”.

Assuming committee members agree that it is time to rejuvenate after their next meeting ends on November 3rd, “the rejuvenation process could begin with the monthly purchase calendars, which start in either mid-November or mid-December,” it said in the protocol.

At the meeting in September, the committee members also agreed more closely on the mechanics of tapering. There has been some speculation that the Fed might prioritize bigger cuts in either mortgage-backed securities or government bonds.

An “illustrative path” proposed by Fed officials would proportionally reduce purchases over an eight-month period, reduce purchases of mortgage-backed securities by $ 5 billion per month and government bond purchases by $ 10 billion per month.

A scenario for the throttling of the Fed

A scenario the Fed is considering reducing its purchases of government bonds and mortgage-backed securities. Source: Minutes of the Federal Reserve Open Market Committee meeting.

Should the Fed decide to start tapering in December, purchases to increase the Fed’s holdings of mortgage-backed securities and government bonds would end in July, although the Fed would continue to maintain its balance sheet by replacing maturing bonds.

Although a final decision has not yet been made on when or how quickly to throttle, Fed officials said the scenario discussed at the September meeting was “easy to communicate” and committee members generally agreed that it was Represent “a simple and appropriate template”. that they could follow.

“Providing the general public with advance notice of a plan of this type can reduce the risk of an adverse market reaction,” noted two committee members.

At an event in South Dakota this week, Fed Board member Michelle Bowman expressed her support for gradual completion of the deal in mid-2022.

Michelle Bowman

“I think our asset purchases were an important part of our response to the economic impact of the pandemic, but they essentially served their purpose,” Bowman said. “I understand that the remaining economic benefits from our asset purchases are now likely to be outweighed by the potential costs.”

Bowman, a Trump-appointed person, said she was particularly concerned that the Fed’s asset purchases “may now add to valuation pressures, particularly in the real estate and equity markets, or that maintaining a very accommodating monetary stance during this period of economic expansion will.” could mean “. Risks to the stability of longer-term inflation expectations. “

If the economy continues to expand, as Bowman expects, “I support a pace of reduction that would end our bond purchases by the middle of next year.”

However, the minutes of the September meeting showed that several committee members “preferred a faster moderation of purchases”.

James Bullard

That includes St. Louis Federal Reserve President James Bullard, who told CNBC this week that he wanted the reduction to begin in November and be completed by the end of the first quarter of 2022.

Although Bullard has long been a proponent of “quantitative easing,” he says he is now in favor of a quick tightening so that the Fed can start raising short-term rates if necessary to fight inflation.

Federal Reserve Chairman Jerome Powell said the Fed will not start raising short-term policy rates – which it cut to 0 percent at the start of the pandemic – until the cut is complete.

“I just want to be able, in case we have to move earlier than we can next spring or summer next year, if we have to,” Bullard told CNBC.

The CME FedWatch Tool, which monitors futures contracts to calculate the likelihood of Fed rate hikes, shows that markets are raising expectations for two 0.25 percentage point hikes in the federal funds rate over the next year with a 53 percent chance that the first increase will be approved, price in July 2022.

Mortgage rates, driven by market forces such as investor appetite for mortgage-backed securities, have already risen on concerns about inflation and the Fed’s tightening.

Mortgage Rate Forecast

Historical (through Q2 2021) and forecast (Q3 2021 and beyond) interest rates for 30-year fixed-rate mortgages. Source: Mortgage Bankers Association.

In a September 21 forecast, Mortgage Bankers Association economists predicted that 30-year fixed-rate mortgage rates would rise 20 basis points per quarter over the next year, averaging 4 percent over the last three months of 2022. MBA forecasters expect 30-year fixed rate loans will average 4.3 percent in 2023.

Rising mortgage rates have already dampened demand for refinancing and could slow the rise in home prices – a development many homebuyers would welcome. However, a sustained rise in mortgage rates could also hurt home sales, some experts warn.

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