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How The Fed Can Taper QE And Still And Not Break the Fragile Housing Recovery

The fed has a hard decision to make, it wants to stop stimulating the economy by buying treasuries and mortgage backed securities (MBS) before it creates a bubble (if it didn’t already) but it is still concerned that these actions may weigh on the overall health and recover of the economy.

An academic paper published by Arvind Krishnamurthy and Annette Vissing-Jorgensen outlined three steps the federal reserve can take that can minimize the possibility of a mortgage rate spike.

First, the fed should stop buying treasuries because they have little impact on the real economy. (They may, however, have an impact on inflation)

Second, the fed should start selling the oldest mortgage backed securities as they would have less impact on the current mortgage rate.

Third, the fed should continue to purchase MBSs as it has a lot of impact on the current mortgage rate. As the demand for MBS increase, the yield subsequently decreases.

A spike in mortgage rate can certainly threaten the improving housing market, so I believe the fed will do all in its power to prevent economic disaster.