Fed's taper delay: Don't get used to it

by Ryan Smith23 Sep 2013

A Fed official said Friday that a small tapering of the government’s bond-buying program is possible next month. His comments come after the Federal Reserve confounded investor expectations this week by deciding to leave the $85bn-per-month program in place for the time being.

James Bullard, president of the Federal Reserve Bank of St. Louis, told Bloomberg Friday that putting off the taper was “a borderline decision” made after weaker-than-expected economic data came in.

“The committee came down on the side of, ‘Let’s wait,’” Bullard said. “…It’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.”

The Federal Reserve began its bond-buying stimulus program last year, dividing its purchases between mortgage-backed securities and Treasury bonds. Mortgage rates spiked in August on investor fears that the Fed would wind the program back in September. Rates dropped slightly this week after the Fed announced it would maintain its bond buys at current levels for the time being.

Bryan McNee, vice president and senior bond analyst for MBSAuthority.com, said Tuesday that originators should expect mortgage rates to rise again on even a modest taper.

“Even though it might be a small dollar amount – say a $5 billion or $10billion reduction – the bond market will react exponentially negatively to that,” he said. “…The market will be focused on which portion they’re tapering. If they leave Treasurys alone and just reduce mortgage-backed securities, then mortgage-backed securities will sell off in a major way. If they leave mortgage-backed securities alone and reduce their monthly Treasury purchases, there will still be a sell-off of mortgage-backed securities, because they feed off that 10-year Treasury note.No matter what they’re going to do, it will cause mortgage rates to increase from where they are right now.

“If I were the Fed, I’d leave treasuries alone, because the country’s operating on a deficit. We have no way of paying off our debt, we can only refinance,” McNee added. “The federal deficit is a much larger issue for the country than a piddly mortgage rate for a consumer, so if they’re smart they’ll pull back on mortgage-backed securities and leave Treasurys alone.”

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