QE3 Tapering begins in 2014

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blog-author-clayjeffreys3

The Federal Reserve announced Wednesday afternoon that the “tapering” process will begin in January 2014. Apparently there will not be a QE4-ever after all!

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The Federal Reserve has purchased bonds for several years now, and as much as $85 billion worth of US Bonds each month since September 2012. The process was called Quantitative Easing or QE as it is commonly known. QE was a two step process the Feds used to help stimulate the economy.

  • Step 1 – by 2008, the Federal Reserve dropped the Federal Funding Rate to near zero. This was to encourage short term borrowing to stimulate the economy. The lowering of the Federal Funding Rate is a common tool used by the Federal Reserve during a recession.
  • Step 2 – due to the severity of the financial crisis, the Federal Reserve began purchasing US Treasury and Mortgage Backed Security Bonds to lower long term lending to help stimulate the housing market along with the auto industry. This strategy was the QE, which turned into QE2, and QE3. The QE’s were partly responsible for the historically low interest rates the country has grown accustomed to seeing. Without QE, interest rates would have never got as low as they did over the past few years.

Instead of having a hard end to the QE program, the Federal Reserve will taper-out of QE. In January, the bond purchasing will reduce from $85 billion per month to $75 billion. The amount purchased each month moving forward will be reviewed at each Federal Reserve meeting and QE will eventually come to an end in a year or two.

By slowing reducing the amount of bonds being purchased, the Federal Reserve hopes the interest rate market has a slow and steady climb on interest rates instead of a volatile and rapidly rising rate market. In theory, historically low interest rates should still be available in the coming year, but rates won’t be as low as they were in 2012 and early 2013.

If you are looking to refinance or purchase a home, how should you respond to this?

I’ve spoken with several clients this year who decided to wait for interest rates to get lower. With the rapid rise in rates starting in early May, some people felt interest rates would eventually fall. With the announcement of tapering, we won’t see interest rates get as low as they have been in the past few years.

The goal now should be to look to get into your new home OR start that refinance process today while rates are still low. To get started, contact me. If the property is in the state of Georgia, I can help you through the loan process.

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3 Responses to “QE3 Tapering begins in 2014”

  1. QE3 Tapering Continues | The Mortgage Blog Says:

    […] discussed on this blog, the Federal Reserve is bringing its current Quantitative Easing plan (called QE3) to an end, but […]

  2. It’s no joke! | The Mortgage Blog Says:

    […] this blog) felt interest rates would rise in 2014 as the Federal Reserve began and continued their tapering plan. Not only have rates held steady, they have slightly improved thus far in 2014. […]

  3. QE3 is officially over | The Mortgage Blog Says:

    […] week. This wasn’t unexpected. Toward the end of 2013, the Feds announced they would begin tapering off their purchasing of bonds, which included mortgage backed security bonds (or MBS bonds). The Feds had several objectives in […]

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