Fed Update November 2021

This week Jerome Powell, Federal Reserve Chairman, made some very important remarks regarding monetary policy, and shed some light on what they are expecting in the coming months and years ahead.

Here’s the bottom line upfront:

• The Federal Reserve will begin tapering their asset purchasing during the end of November 2021.
• They previously committed to finalize this tapering process by mid-2022 (most likely June 2021).
• This represents a systematic reduction of Treasury purchasing by 10% billion per month and mortgage-backed securities by 5% billion per month until completed.
• Inflation is expected to last “well into next year”.

Now for the details on what this means to you, and how to navigate the real estate and mortgage market up ahead.

Fed Tapering

For many months, the Federal Reserve has been purchasing treasuries and mortgage-backed securities in an effort to promote a healthy economy by any means necessary while also hoping to avoid outright catastrophe of the financial markets left to their own devices during a time of global uncertainty. To promote these causes the Fed has been purchasing $120 billion a month of treasuries ($80B) and mortgage-backed securities ($40B). This led to the lowest mortgage rates in recorded history and primed real estate demand to support the fastest home value appreciation in decades. Millions of homeowners benefitted from reduced interest rates that helped families reduce monthly payments, get a cash out refinance, consolidate debt, and even move their primary residence. “Strike while the irons hot” they say and strike they did.

Eventually, it would all have to come to an end and in September of 2021 Fed Chairman Jerome Powell’s comments told us when the end would come, Mid-2022. Having the end in mind is certainly helpful to markets that gain confidence from facts and data rather than speculation about policy matters. Yet, knowing the end of the Fed’s monthly purchasing program is only half the story. How would they unwind $120 Billion a month would take some time, and could not just happen with the flip of the switch.

After several weeks of waiting for a more concrete determination of when the Fed would begin their tapering, we got the answer this week when Jerome Powell announced tapering would begin at the end of November 2021. Knowing this also reflects the monthly decrease of their participation we can expect between the start date and the end date. To unwind $120 billion a month across treasuries and mortgage-backed securities, the Fed will have to minimize their purchasing by $15 billion a month over the next 8 months. This will be split up by a monthly reduction in treasuries of $10 billion a month and $5 billion a month of mortgage-backed securities. This will continue until June 2022 when we anticipate the Fed will have completely removed themselves from this buying program.

What will happen to rates?

Despite history telling us to expect higher rates on the horizon, there is actually debate around the notion that rates may still remain low even when the Fed is no longer participating in the markets. Typically, when risk is passed back onto the open markets banks and lending institutions increase rates to cover liability and full exposure to the ebbs and flows of lending. However, due to inflationary fears and the current threat of housing affordability, some prominent voices are calling for rates to stay at or near their historic lows despite the Fed completely backing out their market participation over the next 8 months. Of course, time will ultimately tell who is right in their assumptions and each bank will ascertain for themselves how to position their rate offerings to consumers.

Inflation

For many months the Fed has been calling inflation “transitory” meaning that the current inflationary measurements are only temporary and are expected to wane or discontinue after a short period of time, like a quarter or even 6 months. “Transitory” inflation is not expected to be long lasting or permanent. At the September Fed meeting Jerome Powell remarked that inflation was “stickier” than they were pleased with and hoped that it would not become permanent in parts of the economy which were seeing much higher than anticipated price increases such as gas, food, and energy costs. Now just a few short weeks later Powell remarked this week that “Transitory is a word that has had different understandings.” So here we are in an on-again-off-again type situation with the Fed wondering whether they actually believe the consumer inflationary pressures will ease up in 2022, or will continue to be a threat.

Mechanically speaking, there will have to be some change to the Fed Funds rate sometime in 2022 to keep inflation from becoming an all-out run-away freight train into the future. And frankly, increasing the fed funds rate is really the only bullet left in the chamber for the Fed. Raising the 0.0% – 0.25% borrowing rate for short term money may be the only way out for them to put downward pressure in rising prices in all consumer sectors. Yes, that sounds counter intuitive, but eventually there is a breaking point where consumers cannot or will not pay the prices they are faced with, especially those on fixed income. And the only proven method of controlling that impact is when the fed raises this short-term rate.

In Conclusion

To say we are at a critical juncture economically may be putting all this lightly, yet we will still seek to see the silver lining in all situations and hope for brighter days ahead. When it comes to how these factors impact local homeowners, this is the kind of thing that sets Mortgage Heroes apart from their competition. Having lived through the mortgage meltdown of 2008/2009 it taught us which market factors to keep an eye on in order to best serve our past client base as well as new clients we meet along the way. While these headlines, fed speak, and economic metrics may seem unrelated to the homebuyer or owner looking to refinance, they make a direct impact on the rate markets and when you should seek to lock your loan. Understanding the intricacies of the market paired with their weight on the mortgage industry makes Mortgage Heroes a primary candidate for any family seeking to obtain their VA home loan at the right time and for the right home.

If you would like to speak with our team about your home loan questions, please complete the form below. You can also start your loan application online by APPLYING NOW.

Rates & Fees Disclosure:
^‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.

^‡ Based on Mortgage Heroes internal data.