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What the Federal Reserves Inflation Concerns Mean for Homebuyers

Minutes from the latest Federal Reserve policy meeting show concern over inflation. Here's what that means for homebuyers heading into 2022.

November 29, 2021
November 29, 2021
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While many consumers worry about what inflation is doing to the price of milk, gas, and holiday presents, prospective homebuyers may be more affected by inflation's impact on mortgage interest rates.

Minutes from the Federal Reserve’s November policy meeting show the Federal Open Market Committee (FOMC) has a close eye on inflation and that some committee members are in favor of a quicker taper plan than the one announced following the meeting.

For homebuyers, a quicker taper plan poses the risk of driving up mortgage rates higher and faster than previously forecasted.

What is the Fed taper?

The Fed taper is a gradual reduction in the amount of bonds and securities the central bank buys in order to stimulate the economy. Early in the pandemic, the Fed began buying $120 billion per month of Treasury bonds and mortgage-backed securities to encourage the flow of cash through the economy. This alleviated risk from mortgage lenders, allowing them to offer historically low interest rates.

Fed Chair Jerome Powell announced a plan to reduce its asset purchases by $10 billion in Treasury bonds and $5 billion in mortgage-backed securities per month beginning in November. This plan would gradually wean the economy off the Fed’s stimulus by mid-2022. However, the meeting minutes released on Wednesday show, in light of inflation concerns, some members are in favor of further reducing stimulus spending.

“Some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the Committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures.”

According to the U.S. Bureau of Economic Analysis, Personal Consumption Expenditures – a key measure of inflation – was up 5% year-over-year in October, the fastest increase since the 1980s.

The Fed’s inflation concerns also stem from the fact that its primary drivers – supply chain tangles and the course of the virus – are so unpredictable. For example, since the November 2-3 meeting, a new coronavirus strain emerged in South Africa, disrupting the stock market and adding further uncertainty to the future of the pandemic and economy.

For homebuyers, the calculus is a little more simple. The Fed is using inflation to gauge the speed of its taper plan, the speed of the taper plan affects mortgage rates, and mortgage rates affect how much house people can buy.

Most housing authorities are forecasting mortgage rates to remain in the 3’s throughout 2022. However, the Fed’s response to stubborn inflation could very well push rates higher.

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