The FED’s Unwinding Plans: Mortgage Interest Rates for 2017

Will the Federal Reserve’s Unwinding of the Quantitative Easing Prove to be Disruptive, Historic or Non-Eventful? What does that mean to your housing payment?

• Central Bank has begun the discussion to potentially unwind from purchasing bonds which previously stimulated the US economy and housing market
• The FED’s QE portfolio has ballooned to $4.5 trillion dollars

What is Quantitative Easing (QE)?

Quantitative Easing (QE) is a historically aggressive program that first rolled out in 2008 by the FED to lower interest rates for consumers. The FED has bought $4.5 trillion in bonds in an effort to lower interest rates. This is no different than Apple buying their own stock to increase their share price.

The largest impact on the economy has been within the housing market. Homebuyers have been the beneficiary of lower mortgage payments due to lower interest rates.

QE was rolled out in the following phases:

• QE1: November of 2008
• QE2: November of 2010
• QE3: September of 2013

What Does “Unwinding” mean?

To unwind QE means that the central banks and the FED are aiming to undo those large purchases on their balance sheets.

On Q recognizes that this unwinding is just as historic as its implementation—incredibly historic , although the outcome remains very uncertain for that reason. We can try to predict the results all we want, but since this is the first time we are seeing this, we have no way of foreseeing the impact yet. It can be disruptive or non-eventful.

“We’ve never have had QE like this before, we’ve never had unwinding like this before,” JPMorgan Chase & Co. Chairman Jamie Dimon said at a conference in Paris on Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

Federal Reserve Chairwoman Janet Yellen testified before Congress this past week. “It's premature to reach the judgment that we're not on the path to [2%] inflation over the next couple of years. …Before we turn that process on and start it, we want to make sure we have adequate ability through our normal interest rate moves to meet the needs of the economy,” she said.

All you have to do is read between the lines of Yellen’s testimony. She is basically telling you point blank that when the FED starts unwinding QE, rates are going up. In my opinion, she appears to be scared of slowing the economy by increasing real interest rates for consumers. She is also signaling that if and when the U.S. economy is growing so fast that it needs to be cooled down - only at that point is she ready to unwind QE.

She is basically telling you point blank that when the FED starts unwinding QE, rates are going up.

What Does this Mean for You?

The potential future QE unwinding may prove to be more disruptive than most people are expecting, especially when we consider unwinding the $4.5 trillion of bond purchases.

In 2017, there are significant macro moving parts for the world-wide economy. At the top of the list, the FED will be looking at huge influencers such as a potential Trump tax plan, the results of the September German vote to potentially leave the Euro, along with the bubble that is about to burst the number two economy in the world—China. Click here

As you can see by their statements, Janet Yellen and the FED clearly do not want to be the ones to trigger a world-wide recession which could slow down other economies like China. In my opinion, the FED would prefer to point their finger at China or Europe as the culprit if this were to lead to another recession. 

Rates are still at historic lows. Given that the future remains uncertain, now is the time for homebuyers to secure long term housing payments and affordability.