We have enjoyed all-time lows on home mortgage interest rates for the past two years during the pandemic, but this year it’s all coming back up as the Fed plans to shrink its balance sheet from $9T to $95B.
Fed has been supporting the economic downturn for the past two years by keeping the interest rates low, but now that the economy is recovering and growing, Fed is trying to cool it down a bit to slow down inflation. Quantitative tightening, as Fed calls its balance sheet shrinking plan. Of the $95B, Fed plans to put a cap of $60B for US Treasury securities and $35B for agency mortgage-backed securities. Remember these bonds have maturity dates, hence, as it matures, it rolls off the balance sheet, and that’s how it is going to shrink. This process will be phased in over 3 months and might be longer depending on market conditions.
In anticipation of the Fed-proposed quantitative tightening plan, banks and mortgage lenders have started to tighten their belts and thereby increasing the cost of borrowing.
Watch this video from Yahoo Finance for more details:
Source: Fed plans to shrink its balance sheet by $95 billion per month
Yahoo Finance, April 7, 2022