US Federal Reserve Announcement - June 20, 2013

BCREA ECONOMICS NOW

US Federal Reserve Announcement - June 20, 2013

Following the US Federal Reserve Open Market Committee's two day meeting, Fed Chair Ben Bernanke surprised markets by suggesting that bond purchases under the Fed's quantitative easing program could be tapered as early as this fall and perhaps eliminated midway through 2014. The market reaction was immediate and dramatic with equity prices tumbling. More importantly for the housing market, an end to Fed bond purchases means less pressure on long-term bond yields and the implications were swiftly incorporated into the yield curve. Medium and long-term rates, in both the US and Canada, spiked on the news with Government of Canada 5-year yields rising almost 20 basis points to 1.7 per cent over the past 2 days.

While it is possible that markets have overreacted to Chairman Bernanke’s remarks, which were phrased as conditional on the economic outlook, if this increase is sustained or if rates continue to rise, posted rates on fixed-rate mortgages will very likely increase as well.  Our most recent mortgage rate forecast assumed that a steeping of the yield curve would result from an improved economic outlook, which the Fed tapering is a reaction to, and that mortgage rates would gradually increase towards the end of the year.  The recent movements in bond yields could move that forecast up by a one to two quarters. Short-term interest rates have seen far less movement over the past month given expectations for the Bank of Canada to remain sidelined through next year. However, a slight increase in 1-year bonds yields may cause banks to reprice 1-year fixed rate mortgages as well.