Anyone whose living is influenced by interest rates knows that throughout most of the Federal Reserve’s history it never purchased securities for its own portfolio. But with the financial crisis the Fed stepped in, creating Quantitative Easing (QE) and buying both Treasury and mortgage-backed securities containing agency (namely Fannie & Freddie) loans. That program will end around Halloween – and then all the smartest guys in the room are saying that the Fed will actually start raising short term rates. But what will it do with its current MBS portfolio, and how might that impact mortgage rates?
The FOMC is at least beginning to discuss the order in which it will take steps to taper off QE normalize policy. The Fed looks unlikely to end its practice of reinvesting maturing securities before it begins to raise rates. The hold-off likely stems from fear of inciting another move in the financial markets, similar to the taper tantrum last spring by appearing to tighten policy earlier than currently anticipated.
The Federal Reserve’s members were in agreement about the likelihood of completing QE by the end of this year. The release of the minutes from the June meeting also shed light on what may be the Fed’s preferred tools when eventually raising the target rate. Interest paid on excess reserves will play a primary role in pushing the Fed’s key rate higher. In order to keep a floor under the effective rate in the market, overnight reverse repurchase agreements, which are already being tested, will play a “supporting” role in the Fed’s impending quest to raise the fed funds effective rate.
What does all this mean for JMAC’s brokers and their borrowers? The primary message is that the Fed appears to be handling rates in a thoughtful, rational manner, that its moves are already priced into the market, and that long-term rates (for mortgages) aren’t going to be surprised by anything that the Fed does. That is good news indeed.