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David Kim: Fed Plans to Unwind Quantitative Easing

The Federal Reserve is in the process of the largest post-recession policy shift since 2015. The Federal Open Market Committee released a statement announcing the unwinding of its $4.5 trillion balance sheet beginning in October.

The FOMC statement said: “Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year.

"Job gains have remained solid in recent months, and the unemployment rate has stayed low. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.

"On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.”

NAR Chief Economist Lawrence Yun responded to the statement: “As the Federal Reserve indicated today, the huge purchases of mortgage-backed securities and U.S. government bonds could not have continued and will unwind beginning next month.

"Looking within the statement, the pace of selling looks to be in slow motion. That means that mortgage rates would rise up only modestly over time.

"Given the pace of unwinding asset purchases with the fewer rounds of anticipated short-term rate hikes over the next two years, it’s expected that mortgage rates should still remain at historically attractive levels.

"The 30-year fixed rate may rise to slightly above 4% by the end of this year, and may only reach 4.7% by the end of 2018.”

The Fed began tapering its purchases in 2013 and wants to get rid of the bonds it owns.

When the United States goes into a housing crisis, the fed acquires mortgage-backed securities and bonds in an effort to push down borrowing costs. This practice is known as quantitative easing and effectively lowers interest rates and increases the money supply in the economy.

— David Kim is a licensed real estate broker with Village Properties and the 2017 president of the Santa Barbara Association of Realtors. Contact him at [email protected] or 805-296-0662. The opinions expressed are his own.

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