Economic research

The Federal Reserve accelerates the reduction of asset purchases

The Federal Open Market Committee today was expected to disclose a more rapid reduction in asset purchases and a possible indication of a near-term rate hike date. The announcement confirmed that the Federal Reserve would reduce its purchases of Treasuries and mortgage-backed securities at a faster pace, given continued strength in employment and accelerating inflation. However, the Fed did not indicate a potential date for a rate hike, while leaving the overnight rate unchanged. In the economic projection documents that accompany it, however, the Fed points to expectations of rate hikes. The documents forecast the federal funds rate to rise from 0.1% in 2021 to 0.9% in 2022 and 1.6% in 2023, revised upwards since the September meeting.

For housing markets, the Fed’s accelerated pullback from mortgage-backed securities purchases will translate into higher mortgage rates in 2022, driving up the cost of borrowing for buyers. In mid-December, the housing market defies historical trends, operating at a higher rate than usual during the colder months. Demand remains strong, keeping inventories low and ensuring prices continue their upward trend. As we look to next year, we expect to see continued gains in transactions, while rising inflation should further eat into Americans’ wallets and bring housing affordability to the fore. With the cost of food, gas, clothing, furniture and cars leaving less room for rent and mortgage payments, rising interest rates will also squeeze homebuyers’ purchasing budget.


George Ratiu

George Ratiu