Fed Winds Down Quantitative Easing
by Steve Rick
The end is near—at least for the Federal Reserve Board’s asset purchase program known as quantitative easing. The Fed has used this tool to purchase $40 billion in mortgage-backed securities and $45 billion in longer-term Treasury securities each month since December 2012.
These purchases put downward pressure on long-term interest rates, including mortgage rates.
After a much anticipated June 19 Federal Open Market Committee statement and press conference, however, the bond market sold off due to the expectation that the Fed would begin tapering its asset purchase program later this year and end the program in the middle of 2014 when the unemployment rate is expected to fall below 7%.
As a result, investors’ demand for longer-term bonds has declined, pushing up interest rates. After reaching a low of 1.66% on May 1, the 10-year Treasury interest rate rose more than 50 basis points (bp) in little over a month to reach 2.22% on June 10. It rose another 23 bp in the 24 hours after the Fed announcement on June 19 to 2.45%.
This rise in nominal interest rates is due to rising real interest rates, not rising inflation expectations. Inflation expectations have fallen 40 bp since the first quarter.
Real interest rates can be measured by using the interest rate on Treasury Inflation Protected Securities. These had been in negative territory since December 2011, indicating investors were losing money in the sense that their annual nominal return was less than the annual expected rate of inflation over the next 10 years.
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