Tapering Doesn’t Mean Fed is Overconfident About Housing Market

Nearly a
month after announcing they would begin their long-awaited tapering of the
quantitative easing program, Federal Reserve officials remain cautious about
the state of the housing market.

A closer
examination
of the minutes from the most recent Federal Open Market
Committee meeting reveals that officials are leery of tightening market conditions
as the new year begins. The decision to taper – which triggers a $10
billion-per-month reduction in bond-buying starting in January and provides the
impetus for potential rises in interest rates – should not be misconstrued as a
wholesale withdrawal of Federal intervention. Rather, the adjustment to the
purchasing plan is simply
the initial step
in a gradual effort at allowing the market to sustain
itself, HousingWire reported.

The pace
with which the Fed buys assets will continue to be contingent upon evidence of
improvement within the labor market and the outlook for inflation. The FOMC
also indicated that its decisions going forward will dictated by the efficacy
and costs associated with making those purchases.

December’s
meeting led to the reduction of mortgage-backed securities purchases, from $40
billion to $35 billion per month. Long-term Treasury securities will also be
bought at a scaled-back pace of $40 billion per month, compared with the
previous rate of $45 billion.

“The
committee should proceed cautiously in taking its first action to reduce the
pace of asset purchases and should indicate that further reductions would be
undertaken in measured steps,” the minutes stated.

The revised
federal funds rate, according to the committee, will remain appropriate as long
as the unemployment level stays above 6.5 percent.

Still
some trepidation

Maybe the best indication of caution from the Fed was the fact that one
committee member, Eric Rosengren, offered a dissenting vote in December.
Rosengren argued that tapering could wait, at least until more convincing
evidence of broad-scale economic growth and inflation potential presented
itself. The committee’s stated goal has been that inflation reach 2 percent
before it would reduce stimulus spending. Optimism is high, but that objective
hasn’t actually been reached yet.

“Almost
all participants continued to project that the rate of growth of economic
activity would strengthen in coming years, and all anticipated that the
unemployment rate would gradually decline toward levels consistent with their
current assessments of its longer-run normal value,” read the minutes.

The only
certainty as the reduced rate of bond buying takes effect is that interest
fluctuations will be monitored closely, and the same cautious optimism will
influence all Fed decisions in 2014. 

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