Mortgage Rates Expected to Increase, Fed To Reduce Bond Purchases

Ben Bernake announced yesterday that the Federal Reserve will begin reducing the amount of bonds it will purchase, from $85 billion per month to $75 billion.  This is the first step taken to "take off the training wheels" on the federal stimulus it created to get the United States out of it's recession.  The Fed’s purchases will be divided between $40 billion in Treasuries and $35 billion in mortgage bonds starting in January, Bernanke said.

“Reflecting cumulative progress and an improved outlook for the job market, the committee decided today to modestly reduce the monthly pace at which it is adding to the longer-term securities on its balance sheet,” Bernanke said at a press conference in Washington today after a meeting of the Federal Open Market Committee.

Stocks rallied on the good news reported regarding the improved economy and reduced unemployment figures.  The Fed said its benchmark interest rate is likely to stay low “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below” the Fed’s 2 percent goal.

Since the Fed began signaling in May that it may soon begin to dial down the purchases, interest rates have drifted higher, with the average 30-year fixed mortgage rate rising to 4.42% from 3.35% in May. The rising rates helped convince the Fed to delay tapering in September.  Rates are expected to continue to increase, but not at an immediate, drastic amount.  However, it will have an affect on the purchasing power for home buyers.

Further complicating the picture is that Fed Chairman Ben Bernanke plans to step down when his term ends in January. Vice Chair Janet Yellen, who has been nominated to succeed him, has expressed an even more pro-growth approach but must deal with a policymaking committee with diverse views of the stimulus.

*Information source from Bloomberg News and USA Today