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What Effects Could The Fed’s “Quantitative Tightening” Have On The Mortgage Market?

[fa icon="calendar"] Jul 3, 2017 11:44:03 AM / by Eustis Mortgage

Eustis Mortgage

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Two weeks ago, the Fed outlined its plan to reduce holdings in Treasuries and mortgage-backed securities (MBS). Typically, this would mean the Fed is simply shrinking its balance sheet; however, this time the new monetary policy is much more complex. In addition to reducing its holdings, the Fed plans to raise interest rates. 

Currently, the balance sheet hovers around $4.5 trillion, $2.46 trillion of which are Treasuries and $1.77 trillion of which are mortgage-backed securities. The significant majority of these assets were acquired during the financial crisis. Since the recession, the Fed has reinvested its assets into new assets, which maintains the hefty size of the overall balance sheet. With today’s “Quantitative Tightening,” the Fed plans to slow this reinvestment process.

So what effects could the Fed’s “Quantitative Tightening” have on the mortgage market? This is a question that many economists are contemplating as monetary conditions will tighten while interest rates rise. The Fed will not reinvest in the bonds as they mature, thus reducing its balance sheet, which makes the situation complicated for investors as they need to consider more factors than they have in the past.

When questioned about the possible risks or benefits of the Fed’s plan, Frank Nothaft, senior vice president and chief economist at CoreLogic, stated that he believed that the effect on mortgage yields would likely be small because investors will seek to acquire MBS. Chief economist at Stifel Fixed Income, Lindsey Piegza, emphasizes the fact that while the market’s reaction remains a “wild card,” the Fed is willing to take another look at the process if the market appears unstable.

Nothaft makes it a point to note that “the steps the Fed has taken to increase the transparency of its actions have helped to lower volatility in the capital markets. A gradual approach has been important to lessening the likelihood of interest rate spikes.”

As the mortgage market continues to shift, make sure to stay up-to-date by subscribing to our blog. For more information about “Quantitative Tightening,” or to learn more about the mortgage industry, contact one of our mortgage specialists today.

Topics: mortgage news, mortgage market

Eustis Mortgage

Written by Eustis Mortgage

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