Financial Advisors

Continue to Watch The Fed, But Refi or Buy as Planned

We’re again talking about the Federal Reserve – most often referred to by the shorthand “the Fed” – because there has been noteworthy activity since I last wrote about it.

While it doesn’t set long-term rates, like mortgage rates, the Fed has assumed a more dominant role in interest rate discussions over the years. Its primary goal is to promote a strong U.S. economy via monetary policy.

But how? Through much of last year and all 2021, the Federal Open Market Committee (FOMC) has been instructing its trading desk in New York to purchase fixed-income securities. The minutes of regularly scheduled FOMC meetings – and there are typically 8 of these a year – containing the verbiage of what the Fed Presidents of the various regions are saying, are released three weeks later. These minutes rarely move mortgage rates since actions have already taken place based on the FOMC’s decision.

At its most recent meeting the FOMC decided to start reducing its near-daily purchases of securities by $15 billion each month. Jerome Powell, Federal Reserve Chairman, said the Fed plans to slow the pace of asset purchases by $10 billion in Treasury securities and $5 billion from mortgage-backed securities (MBS) monthly, with the possibility of increasing or decreasing that amount depending on the economic recovery.

Supply & demand

Mortgage rates are determined by supply and demand, not the doctrine of the FOMC. Last year and in 2021 the Fed has been purchasing some 50 percent of securities backed by Freddie Mac and Fannie Mae loans. The announcement of the tapering of $5 billion a month in MBS purchases which began in mid-November could be cause for concern. The Fed left rates (the Funds Rate and the Discount Rate) the same, as expected, but finally announced its plans to stop buying mortgage and treasury bonds by mid-2022.

Why? "With COVID case counts receding further, and progress on vaccinations, economic growth should pick up this quarter, resulting in strong growth for the year as a whole," Powell said.

“Tapering” may move mortgage interest rates – or it may not – since economic conditions driving the FOMC’s decision already pushed mortgage rates higher. The Fed has been buying these securities, keeping prices high and keeping mortgage rates at historic lows. It's quite possible that rates will continue to inch up, but that is because economic conditions are strengthening, not because the Fed is pushing mortgage rates higher.

Taking your “foot off the gas” is not the same as “putting your foot on the brake” while driving a car. The same goes for the Fed reducing its asset purchases versus raising the Fed Funds or Discount Rates. The Fed is not increasing rates, though many believe this may occur next summer. Pandemic-related supply-and-demand imbalances, supply-chain disruptions, and the ongoing effects of COVID are key drivers of higher inflation today, keeping it well above the Fed's 2 percent inflation goal.

Historically, the Fed has not made an active policy of buying securities, so this is viewed as a return to normal policies. The Fed has also shared that there will be no rate hikes until it is finished tapering. And the tapering itself is expected to be done in a systematic and predictable manner, a little bit each month.

Where are we headed?

The future is impossible to predict, but if inflation or inflation expectations rise further, the Fed may very well accelerate the tapering and finish bond-buying sooner, opening the door to rate hikes sooner. For example, if inflation picks up its pace, or if broad-based employment continues to improve unexpectedly dramatically. The opposite is true, of course.

For the Fed to eventually hike the Fed Funds and/or Discount Rates next year, tapering will be finished, and we will need to see labor market improvement. The Fed will react to indexes such as inflation or employment; it doesn’t drive them. And it will keep interest rates it sets near 0 percent for the foreseeable future.

Again, quoting Powell: “We are committed to our longer-run goal of 2 percent inflation and to having longer-term inflation expectations well anchored at this goal. If we were to see signs that the path of inflation, or longer-term inflation expectations, was moving materially and persistently beyond levels consistent with our goal, we would use our tools to preserve price stability."

Don’t change your plans

The primary takeaway is that potential homeowners will continue to want to buy homes regardless of interest rates. And regardless of the Fed’s actual activities, it remains a good time to either refinance a home or purchase a home.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Keith Canter

Keith Canter is a financial services executive and entrepreneur who serves as CEO and Co-Founder of First Community Mortgage (FCM).

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