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Federal Reserve Announces Taper Plan Clearing Way for Higher Mortgage Rates

The Federal Reserve announced a plan to taper its asset purchases beginning this months. Here's what that means for homebuyers.

November 4, 2021
November 4, 2021
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The era of sub-3% mortgage rates may be in its final chapter after the Federal Reserve announced it will begin gradually reducing the economic stimulus it has been providing during the pandemic.

Following Wednesday’s Federal Open Market Committee (FOMC) meeting, the Committee announced a plan to taper its asset purchases by $15 billion per month beginning in November. FOMC members voted unanimously to approve the policy in light of “further substantial progress” toward goals on employment and inflation.

The announcement, and the taper itself, will likely cause mortgage interest rates to rise in the near and long term. That will directly affect how much homebuyers can afford to borrow and whether it makes sense for homeowners to refinance. However, most housing authorities are forecasting the 30-year mortgage rate to stay below 4% throughout 2022, which is historically very low.

It seems Chairman Jerome Powell’s strategy of carefully foreshadowing the taper announcement over several months averted a repeat of the 2013 Taper Tantrum, when mere announcement of a taper plan caused the 30-year mortgage rate to jump more than a full percentage point in a matter of weeks. This taper announcement was long expected, if not overdue, and its effects may already be baked into mortgage rates.

How the Fed taper affects homebuying

During the COVID recession, the Federal Reserve began purchasing $40 billion in mortgage-backed securities (MBS) -- among other things -- each month. This pushed up demand for MBS (the Fed became the largest buyer of MBS almost overnight). Higher demand lowered interest rates for MBS, which are closely tied to consumer mortgage rates.

That strategy was successful in reducing interest rates to all-time lows and fueling demand for home purchases and refinances. However, it’s had the side effect of driving home prices to record highs and squeezing many buyers out of the market.

With substantial progress toward its employment and inflation goals, the Fed will reduce the amount of MBS it buys each month by $5 billion, beginning later this month (the other $10 billion in reductions is going toward U.S. Treasuries). The taper will surely put upward pressure on mortgage interest rates, which isn’t ideal for homebuyers. But it also may reduce homebuying demand and slow home price growth.

The total taper rate of $15 billion per month is twice as fast as 2013’s. According to Powell, that is by design.

“Demand is much stronger and job openings are much greater now than in 2013. The last taper took years to reach desired conditions,” Powell said. “This is faster than what people had expected six months ago -- earlier and faster. That’s because our policy has been adapting to the situation as it evolves and clarifies itself.”

Powell also said the Fed is prepared to speed up or slow down the taper if it’s warranted, although he did not name a specific scenario that may result in that action. Regardless of the rate, the Fed taper means homebuyers can expect mortgage rates to increase for the foreseeable future.

Mortgage rate projections are not a reflection of Fairway’s opinion or guarantee of interest rates in the current or upcoming market.

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