Allison Schrager THE long viE w
CONTINUING EDUCATION CENTER ket was clearly overheating , was never explained . whether quantitative easing actually helps the economy remains a divisive topic among economists . Fed economists insist it does help , while academic economists are more skeptical . But there is evidence that when the
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Whether quantitative easing actually helps the economy remains a divisive topic among economists . Fed economists insist it does help , while academic economists are more skeptical .
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Fed buys mortgage-backed securities , it brings down MBS spreads and the mortgage rate .
Even though the Fed has ended QE , its role in fueling the screwy housing market may last for the next decade . The Fed would like to shrink the size of its MBS portfolio . So far it plans to do so by not reinvesting all the securities as mortgages are paid off .
But higher rates mean fewer people will refinance or move , so the mortgage portfolio won ’ t shrink as fast as the Fed anticipates . There are some whispers about the Fed selling some of its mortgage-backed securities . if that ’ s the case , Charles Schwab expects the MBS spread will grow even larger , and odds are so will your mortgage rates .
There will also be a hangover from the very low rates in 2020 and 2021 . like many people , i bought a home in the spring of 2021 . now between rising rates and a slower housing market , i am not sure i can ever afford to move . The housing market may be slower and less liquid for a long time .
The MBS market may be less liquid , too . Their buyers normally assume that a large number of mortgages won ’ t last 30 years because people move or refinance . But given that so many people got artificially cheap mortgages before rates went up means their behavior , and the duration of mortgage-backed securities , will be much less predictable . it will be a riskier asset that commands a larger spread .
The Fed has come under lots of criticism lately for being too late to raise rates in response to inflation . But another policy error could be that it kept buying so many mortgage-backed securities later in 2020 and most of 2021 when the housing market was on fire and rates kept dropping .
A 2.6 % fixed rate on a 30-year risky asset never made much sense . it suggests something is off in the market , either through some manipulation or a mispricing of risk . The Fed created major distortions in a market where many Americans have most of their wealth , and the impact may be felt for decades .
AlliSon SchrAger is a bloomberg opinion columnist covering economics . a senior fellow at the manhattan institute , she is author of An Economist Walks Into a Brothel : And Other Unexpected Places to Understand Risk .
22 | financial advisor magazine | september 2022 www . fa-mag . com