The Federal Reserve has been electronically printing up $85 billion of money per month since September 2012 and buying $45 billion in Treasuries and $40 billion in mortgage backed securities from banks. Coming January 2014, they will reduce that amount by $10 billion, cutting the repurchase of each by $5 billion. The initiation of tapering was based on improving economic activity and strengthening in the U.S. economy. All but one Fed open market committee member voted for the cut, with Boston’s Eric Rosengren calling the cut premature.
Fed Chair Bernanke announced it was the intention of the Fed to maintain a targeted low Fed Funds rate of 0.0 to 0.25 percent until the unemployment rate falls below 6.5 percent. Even if the unemployment rate dips below the 6.5 percent target, as long as inflation remains less than 2 percent, expect the Fed to maintain their course. The outlook is for lower interest rates for an extended period. Bernanke stated that “cuts in the future will be made as appropriate,” meaning there is no single direct trigger.
Inflation ran at a pace of 0.9 to 1.1 percent in 2013, with the Fed anticipating 1.4 to 1.6 percent in 2014 and 1.7 to 2 percent in 2015. The Fed is focused on an inflation target of 2 percent. They perceive an inflation rate of less than 2 percent as limiting economic growth.
The purpose of quantitative easing (QE) is to keep borrowing costs low so as to provide some stimulus to economic growth. QE is a non-conventional monetary tool of last resort when the options for other tools are not available.
Many Wall Street experts had forecast that when the Fed initiated reducing this liquidity, stocks would fall and interest rates rise. The Fed’s decision was based on an improving economy, good news for markets. Initial response immediately following the Fed’s announcement was rising stock prices and a slight increase in interest rates. Credit remained readily available.
So what does this mean for real estate?
- This is a very positive statement on the path of an improving economy for the U.S., portending increased job growth into 2014 and 2015.
- The value of the U.S. dollar should strengthen in relation to some currencies. This may impact some foreign purchasers.
- If the Fed is successful in maintaining interest rates at near low historic levels, refinance volumes should not fall as severely as forecast in 2014. Prior to the announcement of the Fed to maintain low rates into the future, refinance volumes were estimated to plunge 52 percent in 2014 compared to 2013, based on the average estimates by Fannie Mae, Freddie Mac and the MBA.
- Ongoing low rates should add strength to the recovering housing market, continuing sales growth of both new and existing homes. Purchase lending, with an average forecast of increasing 13.2 percent from 2012 to 2013, (based on the average estimates from Fannie Mae, Freddie Mac and the Mortgage Bankers Association) was forecast to grow an added 13.3 percent in 2014 prior to the Fed’s actions today.
Perhaps the one surprise today was that Bernanke started the taper just one week in advance of the Senate’s anticipated vote to confirm current Fed Vice Chair Janet Yellen to replace Bernanke.