Taste of Taper Tantrum

August 16, 2021

Last Week in Review: Taste of Taper Tantrum

Home loan rates have crept higher over the last couple of weeks on fears the Fed may taper their bond purchasing program sooner, rather than later. Until now, housing, interest rates, and the financial markets have enjoyed the benefits of the Fed monetary policy and the bond-buying program. Let’s break down what has happened of late in this mini-bond market taper tantrum and what it means for you.

To Taper or Not to Taper

There is increasing pressure for the Federal Reserve to taper their bond purchasing program.

The Fed has a dual mandate of promoting maximum employment and maintaining price stability. On the employment side of the mandate, the labor market recovery is uneven. Yes, the headline unemployment number fell to 5.4% last Friday, but the Labor Force Participation Rate (LFPR) remains at stubbornly low levels. The LFPR measures how many people are actively working or searching for a job, hence they are “participating.” Moreover, there are over 10M available jobs in the U.S., a record high.

So, while the headline unemployment number looks low, the high amount of people not participating, and a record number of help-wanted signs posted remain a concern. It may be enough reason for the Fed to not taper just yet.

On the inflation portion of the Fed’s mandate, the consumer price index was reported on Wednesday and the reading came in a little less hot than feared, which was a good thing for the bond market. The Fed has been saying that high inflation would be transitory or short-lived, so seeing a retreat in prices would be another reason for the Fed not to taper just yet.

But then there’s housing. Home prices have skyrocketed year over year in response to soaring lumber prices, commodity prices, and scorching demand. This has caused housing affordability problems for many. One way many suggest cooling off the housing froth is for the Fed to taper their Mortgage-Backed-Security (MBS) purchases. It’s these purchases that directly affect home loan rates and is a major reason why a thirty-year mortgage continues to hover near 3% – for without the Fed buying over $50B of MBS per month, of late, home loan rates would be much higher.

Bracing for Jackson Hole

Many suspect the Fed will announce their intentions to taper MBS purchases at the Jackson Hole Symposium, August 26 through 28th. No one knows if the Fed will make that signal or if they will wait and hide behind some of the weak labor market components and cooler inflation.

Bottom line: For anyone considering a mortgage, either refinance or purchase, now is the time. The increase in rates we have seen over the past couple of weeks is just a taste of what higher rates would look like if the Fed were to signal their intention to taper MBS purchases.

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