What does this mean and why do you care?

Warning:  Remember, this is a blog.  The goal here is to present the big picture on sometimes complicated subjects. By design, I oversimplify.

First, it will likely mean higher rates.  Mortgage-backed securities have bond-like quality.  They sell with a price (what they cost) and a yield (what they earn).  The law of supply and demand drives price and yield.  Sorry to haunt you with Economics 101. If prices are high, the yield goes down (which generally drives people to sell).  If prices are low, yield is high (driving people to buy).  If the Fed stops buying those securities and there is no other buyer, prices will drop to attract those buyers, yields will go up as a result, and those yields are directly correlated to mortgage interest rates, which means—you guessed it—that interest rates on mortgages have to go up as well.  Got it?

Second, understand that just a few years ago, the Fed owned no MBSs.  None.  By March, it will own $1.5 trillion.  Trillion with a T.  This means that $1.5T is now in the marketplace.  Too much money in the marketplace can mean greater inflation (too much money chasing the same amount of goods).  Now, so far, we haven’t seen greater inflation.  It’s the Fed’s job to keep that in check.  Someone also has to pay for these purchases, meaning that the American taxpayer is likely going to have to pony up money to cover it.  That may mean higher taxes—higher income taxes, higher capital gains taxes, and the list goes on.

We can’t predict the future, but we can do our best to anticipate what might be coming around the blind curves in the road.  This might be a good time to consider refinancing into that 30-year fixed-rate loan if you haven’t already.  This might be a good time to consider a loan modification.  This might be a good time to consider retirements and education funding plans that provide a tax-free component.

Gain Perspective

Think about it in this over-generalized, exaggerated way: Let’s say you have a garbage bag full of 500 $1 bills. If a gallon of milk costs $5, that’s going to cost five of your 500 $1 bills. Not a big deal right? You buy the gallon of milk and you hardly even notice. Now, think about it from the store’s perspective. If the store owners know you have 500 $1 bills, they also know you could easily spend 20 of them without blinking an eye. So they simply charge $20 for the gallon of milk. Ouch! Too much money chasing the same goods.

 If you’re concerned about inflation as it relates to retirement, you know you’ll need much more money in retirement than you do today (that gallon of milk is going to cost more). If inflation is wildly out of control, then your money needs to earn wildly out-of-control returns (and then some) so that you will have enough money for milk in the future. That’s a scary prospect given the stock market roller coaster of late.

 But what if you could reduce or eliminate a big expense in retirement so that you had more money available to spend on milk?  That would mean you would need less money overall and those wildly out-of-control returns would be unnecessary.   For many, that solution and that kind of planning and strategy exist.  The inflation monster might be your friend.  It might be what shows you the door to a tax-free retirement.