The Fed’s Federal Open Market Committee (FOMC) is scheduled to meet tomorrow to discuss whether to decrease bond purchases. No one, of course, can predict what will happen. But many expect Chairman Ben Bernanke to announce a modest scale-back of purchases. In addition to a potential tapering announcement, the Fed may also change the verbiage of their official policy statement. This has the potential to have a significant effect on rates.
Because the Fed, in response to a weak economy, has attempted to assist recovery by buying long-term bonds, both U.S. government debt and bonds issued by government sponsored home-lending agencies. Interest rates close to zero brought mortgage interest rates down to historical lows. BUT, due to signs of strength in the economy, the Fed recently announced the possibility of lessening their bond purchases.
Unfortunately, financial markets have clearly decided that the taper signals a general turn away from boosting the economy. As a result, expectations of future short-term rates have risen sharply, and so have long-term rates, including mortgage rates. In effect, just by talking about tapering, the Fed has already made interest rates rise fairly significantly.
“Ouch.” – Housing market
The good news is, the immediate damage isn’t expected to be too bad. Experts expect the “tapering” to start off fairly slow. Specifically, Bernanke is expected (don’t quote us!) to lessen bond purchase by $10 billion a month to $75 billion, while keeping interest rates close to zero.
“The ($10 billion) appears to be what investors are looking for, as long as the taper is not bigger than people were expecting the market will react positively,” said Paul Mangus, head of equity research and strategy at Wells Fargo Private Bank in Charlotte, North Carolina.
A statement with the FOMC’s decision will be released on Wednesday afternoon, followed by a Bernanke news conference.Tweet