From late 2008 to late 2013 mortgage rates were artificially low as a result of the Fed’s Quantitative Easing program. The Fed announced the program 5 years ago in December of 2008. In fact, the program lowered mortgage rates approximately 2%. During that time The Fed purchased billions of dollars in mortgage backed securities. This resulted in declining mortgage rates and a booster shot to the economy.
Fed to Stop Pressuring Mortgage Rates Down
While the Fed’s rate party went on, they started taking down decorations in 2013. Funding the Fed’s rate lowering program until the economy was back up on its own two feet was the initial goal. Calculating exactly the moment that occurs was the Fed’s delicate challenge. The Fed is instead taking its best guess as to when the economy is in fact stable enough to end this booster shot program.
Take the Training Wheels Off One at a Time
Quantitative easing was like training wheels on a bike. The economy was the bike. The nervous eager youngster trying to ride it across the finish line was the economy. The only difference between the concept of training wheels and the Fed’s taper plan is that a bike has just 2 training wheels. You need to imagine the economy is a bike with 50 or even 100 training wheels. The Fed began removing one wheel at a time by lowering how much money was spent on mortgage bonds. This slight steady and “safe” taper still left several training wheels on the “bike” in the form of continued financial support from the Fed.
The Fed committed to reducing mortgage bond purchases ever so slightly. The patient pace was based solely on the impossibility of determining when the economy was ready to roll on its own as well as how the economy would react to the reduction in Fed support. The Fed also promised to step right back in if the economy slipped. The biggest indicator of slippage – higher unemployment and low job creation.
Where do Mortgage Rates Go Post Taper?
The simplest and most common answer is – UP. However, nothing is “simple” right now in mortgage-land. I agree that overall mortgage rates will trend upward over time as a direct result to the Fed’s taper. However, much of the initial upward movement due to the taper was baked into the mortgage rate market back in June when Fed Chair Ben Bernanke announced a possible taper. The mortgage rate markets reacted to the taper based simply on the notice that it was coming at some point. Rates have lingered up 1% or so ever since (based on a 30 year fixed mortgage). Going forward we will need to closely watch the market and the economy one day at a time to see what is to come and to see how far “UP” rates trend.
By Jeremy House