‘Taper’ Proceeds Apace?

I was recently interviewed by Thomas Ressler for the industry publication Inside MBS @ ABS on the recent change in the Fed’s tapering of its Quantitative Easy program:

Economist Mark Thornton, a senior fellow at the Ludwig von Mises Institute, an economic think
tank in Auburn, AL, said he was “a little bit surprised that the Fed upped the ante on the taper because
they’ve been so skittish and so reluctant. Last year, of course, we had the famous ‘tampering with the
taper’ debacle.

“In the mortgage market, there’s been a pretty steep decline in the amount of new mortgages and
mortgage refinancing,” particularly at the nation’s largest mortgage lenders, he added, “so the amount
of supply on that side of the market is drying up.”

Going forward, as mortgage rates and interest rates rise to meet the challenges of this tapering,
“that should shrink that market even more, so that there shouldn’t be much difficulty adjusting to going
from $35 billion to $30 billion per month in purchases on the MBS side of this policy,” Thornton
added. “So there’s somewhat of an equilibrium process underway, at least in the early steps and stages
of the Fed’s tapering.”

Should the taper have been even larger to make more room for private capital to return this year?
“Well, yes, as a general rule. I wasn’t for this policy to begin with,” the economist said. “I think the
quicker we get rid of it and the quicker we get real private-sector capital in all of these markets, the
better. But I know the Fed knows that as they do taper, it is going to cause some problems, so they’re
playing it very cautiously. I’m a little surprised they’re going at this as quickly as they are.”

Reprinted with permission of Inside Mortgage Finance Publications, Inc., an excerpt from Inside MBS & ABS, January 31, 2014. Copyright 2014.

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