The Real Deal New York

Fed says it will shrink its balance sheet, which is good and bad news for real estate

Quantitative easing has kept interest rates low
June 15, 2017 09:55AM

Janet Yellen (Credit: Getty Images)

The Federal Reserve on Tuesday announced it would raise short-term interest rates again, but the real news was its decision to start selling off assets.

The Fed bought up $4.5 trillion in bonds and other securities in the wake of the 2008 financial crisis in a bid to stabilize financial markets and push down long-term interest rates. But as the economy improves, there is less of a need for the program, dubbed quantitative easing.

“The economy is doing very well, is showing resilience,” Fed chair Janet Yellen said at a press conference. The central bank will shrink its portfolio by a paltry $10 billion for now, but plans to increase that amount each quarter.

“We should want the Fed to raise rates because it signals something good about the underlying economy,” Citigroup strategist Tobias Levkovich told the Wall Street Journal. “When it gets overheated and the Fed has to cut if off, that’s when you get worried.”

The federal funds rate, a benchmark interest rate for overnight loans between banks, is set to rise by 0.25 percentage points to a range of 1.0 to 1.25 percent.

The Fed’s confidence in the U.S. economy should be good news for the real estate industry, but a slow end to quantitative easing also carries risks. By inflating demand for bonds, the program pushed down long-term interest rates, allowing real estate investors to borrow cheaply and pushing up property valuations. A rise in interest rates could reverse that dynamic.

Yellen said the Fed plans to move slowly to avoid market disruption. “The plan is one that is consciously intended to avoid creating market strains and to allow the market to adjust to a very gradual and predictable plan,” she said Wednesday.

Fed officials had earlier indicated that it may be time to start selling off its $1.75 trillion in mortgage bond holdings.  [WSJ]Konrad Putzier