Fed Bond Reinvestment: What does it mean?
Since November 2008 the Fed (aka Federal Reserve) has been investing monthly into the bond markets to drive forward the economy while keeping rates low. When those bonds mature (e.g., 15-, 30-year) the Fed has been reinvesting their profits back into bonds. At this week’s Fed meeting, the committee felt that economy was at the point that two things were ready to happen: bring rates up a .25 point and stop reinvesting the profits back into the bonds markets. I think this raises a couple of questions for most folks:
Q: Why would rates go up?
A: Rates would increase because our economy is healthy and that there is a natural tug-of-war between rates, our economy’s strength and battling inflation. Rates moving upwards is a natural progression when the economy is strong and I view it as a good sign that they feel that we’ve come to this place.
Q: Why are they going to stop reinvesting the profits back into Bonds?
A: They are changing their investment approach because the Fed balance sheet is heavier on bonds than it probably should be. We all know that being too heavily invested in one thing is not the best long term strategy and that it makese sense to diversify. If the economy no longer needs us to invest in bonds, let’s put our money in places that will further support and provide stability for the U.S. economy.
Q: When do you think this would happen?
A: The next Fed meeting is in September and I think their decisions will be based upon how the economy is performing at that time. I do believe they would like to bump rates another .25 point and begin unraveling their bond investments. This means that eventually rates will slowly move up but it will be gradual–not a painful rate hike that will shut down the housing market and make buyers cringe.
Geoffrey Davis – Mortgage Loan Consultant
First United Bank & Trust
6401 S. Custer Rd.
McKinney, TX 75070