How Will The Federal Reserve Impact Cap Rates?

Jonathan Hipp

On July 26^th, the Federal Reserve System (the Fed) announced they will maintain the current target range for the federal funds rate, 1.00% – 1.25%. The Fed also reaffirmed their promise from their June meeting and will “begin implementing its balance sheet normalization program relatively soon.” There are many eyes on this balance sheet because of the far reaching effects of unwinding $4.5 trillion worth of securities.

The Fed has gotten to this enormous balance sheet by purchasing primarily Treasury and mortgage-related securities, which represent approximately $2.5 trillion and $1.8 trillion respectively. These purchases began in 2008 as a way to stabilize the financial system and promote economic recovery following the “Great Recession.” The high demand from the Fed would ensure the bond prices stayed high and thus interest rates low. The Fed expressed an intention to raise the federal funds rate to return to normal before unwinding the balance sheet. This is to ensure interest rates are above their lower bounds, leaving the Fed room to handle effects of reducing their balance sheet.