End of Fed bond buying may nudge mortgage rates

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According to USA Today, the Federal Reserve this week is expected to remove one of the two crutches supporting the economy since the 2008 financial crisis, ending bond purchases that have held down long-term interest rates.

The anticipated decision to halt so-called quantitative easing at a two-day Fed meeting that begins Tuesday marks a milestone in the recovery. But it’s drawing little fanfare and economists expect minimal effect on financial markets, though it could push up mortgage rates slightly.

That’s because Fed policymakers have been signaling the decision for months and  winding down the bond-buying, begun in late 2012. And the strengthening economy is largely being driven by other forces. This has all been fully telegraphed,” says Paul Ashworth of Capital Economics, noting the move is priced into bonds.

Also, the Fed’s other economic crutch — historically low short-term interest rates — remains in place, likely until mid-2015.

Many economists say the Fed’s purchases of Treasuries and mortgage-backed securities sparked a bit more mortgage and other lending and boosted stocks. Its impact recently has been muted, largely because the Fed has tapered the monthly purchases to $15 billion from $85 billion in December as job growth surged.

The Fed’s exit will remove a big buyer. But Ashworth notes the Fed still holds about $4 trillion in  securities it has snapped up since 2008. That will keep market supplies and rates low.