Tapering and Tightening…

  • December 18, 2013

tapertoonTapering and Tightening…

The Fed finally did it. I almost can’t believe it. After weeks of strong economic data, the Fed finally announced they will begin to taper bond purchases. Let’s break it down…this is so exciting.

To recap, the Fed has been buying Treasuries and Mortgage Backed Securities to keep interest rates low and fuel the economy.  They called it Quantitative Easing. Recently, economic data indicated the economic recovery was gaining momentum. The taper talk increased and investors prepared for the announcement. Ben Bernanke had us guess for months now and investors grew anxious. Then it happened. Today was the big day. It’s taper time…let’s break it down.

  • First, let’s define “taper.” The Fed will reduce bond purchases by $5 billion a month. What’s $5 Billion amongst friends? The market responded, and prices of mortgage backed bonds plummeted. However, after a few minutes the market rebounded and investors seem to be taking the news well.
  • The Fed needs to pump money into the economy to generate job growth, but not too much money where it would cause prices to rise. It’s a delicate balance, but fear not, the Federal Bank will be watching.
  • Bernanke defended the tapering decision stating the cost of asset purchases will increase as the balance sheet grows. Meaning the benefits of buying at the current pace is not worth the risk.
  • Good news for borrowers; the Fed is committed to keep interest rates low for the foreseeable future. Actually, this is good news for all of us!
  • Side note, the Housing Start Index was up 22.7 percent, the largest increase since January 1990. This is just another sign the economy appears to be strengthening.

It looks like 2014 is the year of tightening and tapering. Let’s consider it the Fed’s New Y ear’s resolution. Where are my Jane Fonda videos? See you tomorrow.

By Lindsey Fediuk, Quicken Loans Capital Markets Analyst

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