FOMC Announces Spending Reductions

The Federal Savings Bank comments on the the Federal Open Market Committee's recent policy of tapering its quantitative easing program.

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The Federal Savings Bank

Chicago, IL (PRWEB) March 27, 2014

The Federal Open Market Committee revealed on March 19 that the Fed plans to keep interest rates near record lows while continuing to taper monthly bond purchases. The Federal Savings Bank found this comforting for the short term, but concerning for its mortgage applicants for the long term.

In her first meeting as Chairwoman of the Fed, Janet Yellen announced that the central bank would reduce stimulus spending to $55 billion per month. Some economists speculated about what the Fed would do as recent economic reports have shown that the economy appears to be experiencing a slowdown. In the statement, Yellen said the slowdown was a result of harsh winter weather and is expected to turn around, though the unemployment level remains elevated.

The Fed is determined to reduce its monthly bond purchases that have helped the housing market recover and keep mortgage rates low for the last two years. Yellen stated the spending program is likely to wind down later this year, which could affect interest rates in early 2015, about six months after quantitative easing subsides. While this could affect potential homebuyers - first-time home buyers in particular - borrowers aren't likely to see mortgage rates rise too far above 5 percent. To keep long-term interest rates at their record low levels a little longer, Yellen said that the federal-funds rate would remain at zero, six months after the bond-buying program ends.

As the Fed continues to reduce its spending, the goals of the initial plan are under tight scrutiny from economists. In previous statements, officials from the bank have said the Fed would not begin to taper quantitative easing until the unemployment rate reaches 6.5 percent. Despite this promise, unemployment is around 6.7 percent nationally, marking those initial guidelines as irrelevant.

What it means for housing
The Federal Savings Bank finds that the fiscal policy of the Federal Reserve has largely been successful for the housing market, which has seen home prices rise as well as sales as a result of low cost mortgage options. While mortgage rates have risen over the last year about 1 percent, interest rates are still relatively low for most borrowers. The mortgage refinance sector has begun to shrink with rising rates, though the number of new home purchases has expanded.

When asked by a reporter about how the housing market is expected to react to sustained low rates, Yellen responded: "I do expect housing activity to begin to expand more rapidly," reported MarketWatch on March 24.

Despite this comment, Yellen also noted there was still work to be done in the housing market including increasing construction of new homes and bringing younger buyers into the market. MarketWatch reported that the number of new construction starts was 907,000 in February, well below the 1.7 million economists estimate are needed to keep up with the demand and population growth.

The latest decisions from the March Federal Open Market Committee meeting could prompt another rise in mortgage rates and could impact affordability for some homebuyers and borrowers. The Federal Savings Bank believes that for the next 6 months mortgage rates may steadily move higher, especially with the onset of spring and summer demand. However, over the long term, the lender thinks that mortgage rates will shift much higher once the Federal Reserve raises interest rates.

Contact the Federal Savings Bank, a veteran owned bank, for the best mortgage options.