September 19th, 2013
The Federal Reserve announced that it will not begin tapering off its monthly bond purchases of $85 billion in favor of waiting until the economy shows significant improvement. The Fed concluded the rate of recovery was not fast enough for the central bank to start cutting back on its monthly bond purchasing, multiple news sources have reported.
“The downside risks to growth have diminished over the past year,” said Federal Reserve Chairman Ben Bernanke, after the Federal Reserve officials reached a decision during a regular meeting. “However, the tightening of financial conditions in recent months, if sustained, could slow the pace of improvement in the economy and labor market.”
Any future tapering of the bond purchases will depend on economic improvement and a reduction in buys could be expected later this year. The Fed downgraded its expectations for economic growth after the most recent jobs reported showed that only 169,000 jobs were added in August, below expectations. For next year, GDP growth is expected to be between 2.0 and 2.3 percent instead of the original projection of growth between 2.3 and 2.6 percent.
After Bernanke expressed that the central bank was discussing reducing its bond buys, many economists were expecting the Fed to announce it would start to cut back. Economists surveyed by CNBC had anticipated the cutback to be modest at first, around $15 billion.
Currently the Fed is spending $40 billion each month for mortgage-backed bonds. For mortgage borrowers, the announcement is good news, as interest rates were expected to rise with the reduction. Though interest rates did climb one percent over the summer to 4.75 percent for 30-year fixed rate mortgages, historically they are relatively low and have helped spur home sales. Federal bond purchases, as part of economic stimulus efforts, were a major influence for keeping interest rates low. The housing market is critical to the economic recovery, and higher rates could deter homebuyers and sales, slowing the rate of improvement.
The Fed’s monthly bond purchases, called the quantitative easing program, boosted a surge of new homebuyers and helped home prices rise back toward historic norms. In their statement, Federal Reserve officials said they would not begin to taper off mortgage-backed bond-buying until unemployment had reached 6.5 percent. Currently, the rate has dropped to 7.3 percent, showing slow but steady improvement.
Mortgage application activity rose 11.2 percent in the beginning of September, according to the Market Composite Index by the Mortgage Bankers Association.