The Federal Reserve has been supporting the housing market during the virus crisis, the 2020 recession, and the subsequent, ongoing recovery via asset-backed purchases (among other tools), including $40 billion a month of mortgage-backed security (MBS) purchases. These MBS purchases have held interest rates lower than they otherwise would have been. Today, the Fed moved closer to announcing a tapering or gradual cessation of these purchases, as it supports the goal of maximum employment and price stability.
The Fed noted in its statement:
…the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.
Our expectation is that this widely anticipated taper (thus avoiding something like the 2013 taper tantrum) will be announced at the next Federal Open Market Committee meeting in November and will commence in December. The taper will end with a zero level of MBS purchases by mid- to late-2022, a faster path than the prior tapering that occurred in 2014.
The Fed’s economic projections shifted somewhat in today’s statement. The Fed reduced its 2021 GDP forecast to 5.9%. The unemployment forecast for the year was increased from the June estimate of 4.5% to 4.8%. The Fed also increased its inflation forecast for 2021 (core PCE measure) from 3% to 3.7%.
At this week’s meeting, the Fed held constant its target range for the federal funds rate at 0% to 0.25%, where it has been since the spring of 2020. The “dot plot” of policy expectations now indicates that 9 of the 18 participants anticipate a first hike of this target in 2022, up from 7 at the June meeting. The projection also indicates a median top range of 2% for the federal funds rate by 2024.
The inflation outlook is currently being driven by opposing short-run and long-run forces. In the short-run, supply-chain bottlenecks and pressure from a reopening of the economy is increasing inflation. However, long-run factors favor lower inflation, due to demographics (an aging population), global trade, and technology. The winner of these countervailing inflation trends will determine the future of mortgage interest rates, which is critical given the more than 30% gain in home prices since January 2020 and declines for housing affordability.