Fed Is Not Ready to Set Timeline for Asset Tapering, Minutes Show

The Federal Reserve is in no rush to tighten monetary policy or taper the bond purchases that last year sent mortgage rates tumbling below 3%, according to the minutes of its June meeting that were issued on Wednesday.

The Fed's balance sheet topped $8 trillion for the first time last month, fueled by the asset-purchase program it started in March 2020 to bolster the economy and keep credit from drying up during the pandemic. Since the Fed became the market’s biggest buyer, mortgage rates have tumbled to records more than a dozen times. Earlier this year, the average U.S. rate for a 30-year fixed mortgage set an all-time low of 2.65%, according to a Freddie Mac survey.

During June’s meeting, members of the policy-setting Federal Open Market Committee, or FOMC, pledged to continue purchasing at least $80 billion of Treasuries and $40 billion of mortgage bonds a month to support credit markets, according to the minutes. Both types of bond purchases put downward pressure on home-loan rates, because increased competition means investors have to accept smaller yields.

Last year, the central bankers said they would continue purchasing the bonds until there was a substantial improvement in the economy.

“The committee’s standard of `substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue,” the minutes of the June 15 and 16 meeting said. “Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the committee would have information in coming months to make a better assessment.”

Most bond-market participants expect the Fed to begin tapering its asset purchases in the fourth quarter of 2021 or the first quarter of 2022, the minutes said, citing a survey conducted by the central bank.

“The taper will start before fed funds are hiked,” said Chris Low, chief economist at FHN Financial in New York. “THE FOMC has not decided when to taper, but it has committed to keep the discussion going at future meetings.”

Extricating itself from the bond markets is dicey business. The last time the Fed wound down an asset-purchase rescue program – and, it’s only happened one other time, in 2013 – the average U.S. rate for a 30-year fixed mortgage spiked more than a percentage point as traders worried the world would come to an end. Wall Street money managers called it the "taper tantrum."

This time, the market has been calmer. The average U.S. mortgage rate was 2.98% last week, according to Freddie Mac. That’s within a third of a percentage point of the all-time low set in early January.