In a move much-anticipated by Wall Street, the Federal Reserve is accelerating its taper plan and moving up its timetable for interest rate hikes.
Following this week’s meeting, the Federal Open Market Committee (FOMC) decided that it would reduce its stimulus spending by $30 billion per month instead of the previous rate of $15 billion per month.
Beginning in January, the Fed will buy $40 billion in Treasury bonds and $20 billion per month in mortgage-backed securities – half of what it had been buying prior to the November taper.
The accelerated taper puts the central bank on track to end its asset purchasing program in March instead of June, and clears a path for multiple interest rate hikes in 2022. The meeting’s Summary of Economic Projections shows that a plurality of Committee members see three interest rate hikes totaling 0.75% by the end of 2022.
What does accelerated taper mean for homebuyers?
For homebuyers, this monetary policy tightening by the Fed means one thing: higher mortgage interest rates in 2022.
Throughout the pandemic, the Federal Reserve has been buying $120 billion per month in Treasuries and mortgage-backed securities in order to encourage lending and spending. This asset purchasing program kept mortgage rates artificially low and kept the housing market humming in 2020 and 2021.
With the economy recovering, and inflation running hotter than previously expected, the Fed installed a plan to reduce – or taper – its asset purchases by $15 billion per month beginning in November. At a taper rate of $15 billion per month, the program would have ended in the middle of 2022.
Now, with the inflation rate hit a 30-year high in November, the Fed is accelerating the taper plan by reducing its purchases by $30 billion per month, putting the program on track to end in March.
Not only does this hawkish policy combat inflation by removing money from the economy, it moves up the timetable for the Fed to raise interest rates. The central bank has been maintaining near-0% interest rates throughout the pandemic, which successfully encouraged spending and also fueled inflation.
For homebuyers, this will raise mortgage rates and reduce the amount of house they can afford. However, it may also help to cool demand in the housing market, which has been running red-hot for more than a year, and reduce inflation on consumer goods.
Previous housing authority forecasts suggested the 30-year mortgage rate will stay below 4% throughout 2022. The Fed’s hawkish policy stance is likely to put upward pressure on rates in the coming year.