Special Update: What Will the Fed Do?
What is likely to happen to mortgage rates tomorrow after the Fed statement is released? The best answer is that it will be extremely volatile. The majority view is that the Fed will begin to taper its bond purchase program, but the reaction in the mortgage market will depend on the details. The first question is the size of the reduction. Investors expect the Fed to cut its monthly purchases from $85 billion to around $70 billion. It is also uncertain how the reduction will be split between MBS and Treasuries. We would not be surprised if the Fed cut only Treasury purchases and left MBS purchases unchanged, since several Fed officials have stated that MBS purchases provide a greater boost to the economy than Treasury purchases. In addition, it will be important to hear how the Fed plans to determine future reductions. Of course, there is no guarantee that the Fed will announce a taper on Wednesday at all. Investors have taken positions based on their expectations for the Fed statement, and there likely will be a large reaction tomorrow afternoon following its release.