In minutes from its last meeting, released this week, the Federal Reserve signaled the members of its Federal Open Market Committee (FOMC) were open to the idea of unwinding some of the $4.5 trillion in bonds that are on the Fed’s balance sheet, as a result of Treasury purchases after the Great Recession.
Under the approach proposed to FOMC members by Fed staff, the FOMC would announce a set of gradually increasing caps on the amount of Treasury and agency securities allowed to run off the balance sheet each month, and only reinvest in those which exceed the caps.
“As the caps increased, reinvestments would decline, and the monthly reductions in the Federal Reserve’s securities holdings would become larger,” the Fed minutes stated. “The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalized.”
The FOMC signaled in its minutes that it would consider an increase in the federal-funds rate at its June meeting, barring extraordinary circumstances, which would be the third increase in the rate in seven months. The Fed previously only raised rates once in 10 years prior.
The unwinding of the balance sheet, however, brings the potential for additional increases to interest rates.
“Limiting the magnitude of the monthly reductions in the Federal Reserve’s securities holdings on an ongoing basis could help mitigate the risk of adverse effects on market functioning or outsized effects on interest rates,” the minutes stated, noting the potential for outsized effects on interest rates.
Still, “Nearly all policymakers expressed a favorable view of this general approach,” the minutes stated.
The latest mortgage finance forecast from the Mortgage Bankers Association (MBA) expects rates on 30-year fixed mortgages to grow from 4.2 percent in the second quarter of 2017 to 4.6 percent by the end of the year. The most recent weekly report from Freddie Mac showed 30-year rates averaged 3.95 percent.
How would a potential June increase in the federal-funds rate, accompanied by an unwinding in the Fed’s balance sheet, affect the housing market?
The latest MBA forecast calls for purchase originations to fall steadily through the year, from $316 billion in the second quarter to $241 billion in the fourth quarter, and for refinance originations to fall from $147 billion in the second quarter to $107 billion in the fourth quarter.
Fannie Mae Deputy Chief Economist Mark Palim will discuss the impact of steadily rising interest rates on the housing market, along with a broader view of the housing and economic forecast, in a session title “Economic and Consumer Trends,” at the National Settlement Services Summit (NS3) on June 7 in San Antonio.
For more information on the 2017 NS3, including the agenda and a list of speakers, click here. You can register for NS3 online or click here to get information on how to register via mail, fax or phone. For sponsorship opportunities, email [email protected].