Rates Ease as Fed Says it Will Slow Pace of Balance Sheet Tightening

GettyImages 1445805676 1024x713

GettyImages 1445805676 1024x713

Federal Reserve policymakers have announced a reduction in the pace of “quantitative tightening” to $40 billion a month, which is less than half of the pace originally planned two years ago. This change is expected to impact mortgage rates, which looked poised to decrease following this announcement. At its latest meeting, the Fed kept short-term federal funds rates unchanged at their current target of 5.25 percent to 5.5 percent. Fed Chair Jerome Powell’s guidance from March indicated that the Fed will slow the pace of trimming its long-term Treasurys by $35 billion a month starting on June 1. Additionally, the Fed’s balance sheet easing will now total only $40 billion a month due to challenges in reducing its mortgage-backed securities holdings.

The decision to slow the pace of balance sheet runoff aims to ensure a smooth transition and reduce the risk of money market stress. This adjustment is part of the Fed’s strategy to reach the appropriate level of ample reserves gradually. The Fed aims to avoid disruptions in money markets, similar to what occurred in 2019, as it reduces its balance sheet.

Overall, the Fed’s decision to dial back the pace of quantitative tightening is seen as positive news that could have a favorable impact on interest rates without the need for adjustments to the Fed funds rate. Green shoots of hope are emerging as modest relief on the horizon.

In response to the Federal Reserve policymakers announcing a reduction in the pace of “quantitative tightening,” mortgage rates were expected to drop. The Fed plans to slow the unwinding of their $7 trillion balance sheet to $40 billion a month, significantly less than initially anticipated. This decision is aimed at ensuring a smooth transition and avoiding financial market turmoil. While the Fed left short-term interest rates unchanged, there is uncertainty about potential rate cuts later in the year. The adjustment in balance sheet tightening is seen as positive news for interest rates. Overall, the Fed’s focus is on a gradual approach to reaching the appropriate level of reserves without causing disruptions in money markets.

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