The US is signaling the end of easy money might be near. The Federal Open Market Committee (the Fed) announced a taper to quantitative ease (QE). The central bank plans to reduce asset purchases this month and the program could wind up by next summer. This will translate into more expensive credit and may pump the breaks on home price growth.
Quantitative ease (QE) is a tool used to stimulate demand and create inflation. Central banks buy large amounts of bonds, flooding the market with excess capital. By doing so they drive the cost of borrowing lower for virtually all segments.
The idea is to make money so cheap, it would be silly not to borrow and buy things now. An increase in demand creates more employment (ideally) and drives inflation higher. It’s a stimulus program designed for periods of reduced consumption, like a recession.
US Federal Reserve To Taper QE and End In 2022
The US Federal Reserve announced they’ll begin tapering its QE program. This month they’ll drop asset purchases to $105 billion, down $15 billion from last month. They’ll buy $70 billion in treasuries and $35 billion in mortgage-backed securities (MBS). December will follow with a similar reduction of another $15 billion once again. At this rate, the program should wind up by June of next year.
Elevated Inflation Is Now The Risk
The US hasn’t hit its employment target but QE is creating too much inflation. Asset purchases won’t end if employment doesn’t recover but inflation is now a big problem. The risk “appears to be skewed toward higher inflation… we need to be in a position to act if it becomes appropriate to do so,” said Fed Chairman Jerome Powell.
What does this mean for you? The cost of credit should rise as the liquidity injections are reduced. It will become very clear to mortgage borrowers soon. As QE winds up, mortgage rates should rise and budgets should shrink. Both of those things add up to a more difficult growth environment.
Note that’s more difficult, not necessarily difficult. Let’s not get this twisted, there are still billions in stimulus being pumped into the economy. In no way is this natural and it won’t be until we start to see the actual end of QE. Borrowing costs will still be low for a long time, they just won’t be at the record low we saw during the pandemic.
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