Minutes released from the July 17-18 Federal Reserve policy meeting indicate the most aggressive phase of accommodative monetary policy has run its course. A tentative deadline of October was set to shut the door on a highly controversial third round of quantitative easing (QE) that tested the limits of the central bank’s balance sheet.
Since September 2012, the Fed purchased hundreds of billions of dollars of mortgage-backed securities in an effort to stimulate the economy by augmenting its zero rate policy with additional stimulus. The enormous quantitative easing program was designed to benefit lenders and borrowers in the real estate industry, still suffering from the previous mortgage crisis.
According to the minutes, the Fed feels they’ve given the domestic economy enough runway to finally take flight. “If the economy progresses about as the Committee expects…the final reduction would occur following the October meeting,”
Although QE may be set to end in October, Fed policymakers are debating how best to reduce their holdings without causing any disruption to financial markets. Specifically, there is discord regarding whether the program should cease before or after discussion takes place on raising interest rates.
Though the Fed’s bond-buying experiment has arguably aided the housing recovery since the Great Recession of 2008, it’s still unclear where the chips may land come October. Today’s mortgage rates are at historic lows, which has given certain pockets of the US a well-earned economic boost. But many first-time homeowners are still left out in the cold.
Higher interest rates coupled with still stringent mortgage rules may not be the perfect recipe for further improvement in the real estate market. Banks are still anxious about potential liability on loans sold to government-backed Fannie Mae and Freddie Mac. Any improvement in bank participation depends on clearer guidance from the Obama administration about government guarantees of loans to first time homebuyers and borrowers with below average credit scores.
Those eager to see what the US economy looks like without QE should get a glimpse come October. Even as the interest rate debate continues, stocks hit new highs with the Dow Jones Industrials crossing 17,000 last week. Bulls are quick to point out that measly bond yields for the foreseeable future leave investors with seemingly no choice but to pursue higher returns in stocks. The bears are betting on rising inflation, weak economic growth and higher interest rates sooner than anyone expects to take stock prices significantly lower.