Last Wednesday, the Federal Reserve announced it would begin gradually paring back on its purchase of non-traditional assets aimed at stimulating growth. Beginning in January the Fed will reduce it’s monthly purchase of Treasuries and mortgage-backed securities by $10 Billion, from $85 to $75 billion. The statement also outlined forward guidance for the Federal Reserve’s primary policy instrument, short term interest rates.
Chairman Bernanke made it clear that the Fed’s easy money policy would continue beyond the previously indicated threshold of 6.5 percent unemployment. He also announced that that rates would not increase until 2015 at the earliest – a consensus among the committee’s voting members.
Because of the Fed’s purchase of mortgage-backed securities it’s likely that mortgage rates will continue to rise, though it may not be a dramatic increase given the modest reduction in the purchase of these assets. Nevertheless, sellers who need to move to a new school district or into a larger home, should consider listing sooner. And buyers who are on the fence would be wise to whittle down their list and make an offer, especially those who want to purchase in areas where prices are spiking. The decision could also encourage cash-rich onlookers to come out and buy – at least those who can afford it.
Overall, the Feds increased clarity coupled with the expectation of continued monetary accommodation and low, short-term interest rates should keep the economy growing. This was well-illustrated last week when markets responded favorably putting the Dow Jones up nearly 300 points (1.8 percent).