In a move that signals growing, widespread confidence about the strength of the national economy, the Federal Open Market Committee voted last week to increase the target range for interest rates and to decrease the rate at which it purchases treasuries and mortgage-backed securities.
According to a recent press release from the Fed, the committee will begin reducing the amount of mortgage-backed securities it purchases each month by $4 billion during the latter part of this year.
At the same time, the Fed will also begin slowing down its reinvestment into treasuries by a factor of $6 billion per month. On the surface, this sounds like something that could potentially cause a massive shift in the health of the economy, but it is not quite as impressive once you consider the Fed is currently purchasing approximately $30 billion in mortgage-backed securities per month.
Both numbers, the $4 billion and $6 billion, will increase after three months from the start date of the initial commencement of the easing of the re-investment. For mortgage-backed securities, the Fed is expecting to reduce its reinvestment by an additional $4 billion every three months, until a ceiling of $20 billion has been reached. With treasuries, the Fed is hoping to take an additional $6 billion increment off the table every three months, until a ceiling of $30 billion has been achieved.
This reduction of capital infusions into the smaller lending institutions will continue its downward spiral for a number of years, until the estimated $4.5 trillion the Fed is holding in its virtual coffers is reduced to a smaller amount, probably a little more than $200 billion or so. I say $200 billion because this was the amount the Fed held on its balance sheet prior to the implementation of quantitative easing, and everyone expects them to hold more funds on hand than in the years leading up to the recession, if nothing else than a strategy for minimizing risk.
I say virtual because the necessary assets to purchase the securities never existed in the first place; it was just virtual, cyber-credit created by the Fed to provide the banks with liquidity. This is a prime example of what people mean when they talk about the banks’ ability to simply print more money.
By the way, a trillion is 12 zeros. Also, in case you are one of those people who don’t think about economic policy on a daily basis, quantitative easing occurs when a central bank uses credit to purchase securities through member institutions, in an effort to increase the money supply, add liquidity, spur lending to individuals and small businesses and control inflation.
Quantitative easing was instituted in the U.S. in 2008 to help the banks by taking risky mortgage-backed securities filled with subprime loans off their balance sheets. The intent was to encourage banks to increase lending to individuals and small businesses, to expand the economy, and in many ways, it succeeded.
What does this mean for me? The crux of it is that interest rates are going to begin to climb over the next few years, but for good reasons. Confidence about the economy is high or the Fed would not be considering taking off the training wheels. This means that now is a great time to purchase a home, not only because it is a viable, stable long-term investment, but also because interest rates are going to climb, purchasing power will decline, and the experts at the Fed agree: the future economic outlook is positive.
Give me a call today at the number below for a comprehensive assessment about your options for purchasing a home.
Patrick Stoy (NMLS Numbers 39527 and 39166) has 18 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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