At press time, recently appoints Fed Chairwoman Janet Yellen is being presented with a challenge right out of the gate. Do we taper the taper?
The Federal Reserve is currently buying $65 billion in bonds per month (down from the high of $85 billion) in an effort to keep mortgage and treasury rates down. The Fed seems to be on course to reduce their bond purchases by $10 billion per Fed meeting, which occurs approximately every six weeks. The Fed has already decided to taper for a second time since the tapering started in December. The Fed has stated that they would like to be on track to be completely out of the bond buying business by the end of the year. They have also communicated to the market that they would also be ready to pause the taper should the economy become weak again or signal that we are hitting a soft patch.
So here’s the problem. January non-farm payrolls were expected to show approximately 200,000 jobs created and the actual number came in at 75,000, a 60 percent decrease from what was expected. February’s non-farm payrolls were expected to show approximately 190,000 jobs created and the actual number came in at 113,000, 40 percent below what was expected.
The actual unemployment rate fell to 6.6 precent from 6.7 percent but most of that is attributed to discouraged job seekers not looking for work. The labor participation rate matched a 35-year low, which means that we were at the fewest amount of people actually looking for work. All this combined with stagnant wages, low inflation and existing home sales being down, and one has to wonder what the Fed will do?
The Fed has stated that once the unemployment rate hits 6.5 percent and inflation is at 2 percent, they will begin to raise short-term rates. Look for this to be put on hold because the unemployment rate could be at 6.5 percent in March or April.
The taper currently is in the early rounds, but I feel that the Fed will continue at its current pace of buying $10 billion less per meeting until they are completely out of the market and then they will begin to look at raising short term rates.
This means that, unless we have employment report in March that only shows 75,000 or less of job growth, the Fed will continue reducing its purchases, which means that mortgage rates will go up. Home equity lines of credit will not be affected until the Fed starts raising short-term rates, which should not happened until 2015 at the earliest.
If the Fed pauses the taper, you will know that the economy is not doing well, which will send the rates down and throw everyone’s expectations about the economic recovery out the window. All the Fed bond buying has helped the economy and unemployment, so a pause in tapering those buying purchases would signal a lot of weakness.
All bets are off on the economy should the Fed pause. The sad thing is that it really could happen.
For more, call 773-557-1000 ext. 15, e-mail firstname.lastname@example.org or visit www.ronmortgage.com.