The Effect of the Fed on the Housing Market

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The Effect of Fed Tapering on the Economy, the Housing Market, and Stocks
Source: Forbes

Amid raging speculation, last week the Federal Reserve ultimately decided against tapering due to concerns about the impact on the country’s recovery, which means it will not reduce its stimulus for the U.S. economy (i.e. its $85 billion per month asset purchase program). By postponing the pullback, the housing market is expected to experience lower interest rates—much to the benefit of prospective buyers. Rising mortgage rates and government spending cuts are two key factors the Fed cited in its decision.

Making sense of the story

  • When tapering does occur, there are two potentially detrimental effects, namely higher mortgage rates and increased costs to the federal budget. A strong economy is dependent on the housing recovery, so if its progress is weakened, the impact will be felt in the economy as a whole.
  • Forbes expects tapering – when it takes place – to remain “highly accommodative” in that it will not raise short-term interest rates right away.
  • Some estimates suggest tapering will begin in December since the economy will be performing well during the peak of the holiday season.
  • Any hint at tapering thus far has led to a sharp response in the stock market, with shares rapidly being sold. Investors are advised to plan for (and protect against) a sharp decline.
  • Forbes asks a few key questions about tapering: “The time will come when the Fed will begin to reduce its asset purchases. How will this impact the financial markets? Perhaps more important, have the financial markets become so accustomed to the Feds easy money policy that the addiction is deeply ingrained?  In other words, has the stock market consumed so much punch that the withdrawals will be severe?
  • The Fed announced that it plans to keep its key short-term interest rate near zero at least until unemployment falls to 6.5 percent, down from 7.3 percent last month.

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Category : Blog

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