In 2022, the Federal Reserve initiated plans to reduce the balance of its holdings, a move that has significant implications for mortgage rates across the United States. The Fed aims to decrease its asset holdings by allowing them to mature and "roll-off" its balance sheet, a process known as quantitative tightening. This development has many Americans eagerly anticipating a decrease in mortgage rates, hoping for relief similar to the record lows seen in 2021 during the pandemic when the Fed employed different strategies.
The Fed's aggressive purchasing of mortgage-backed securities in 2021 significantly impacted mortgage rates, bringing them to unprecedented lows. However, this approach is now being scrutinized. Matthew Graham, COO of Mortgage News Daily, commented on the strategy:
"They were extra aggressive in 2021 with buying mortgage-backed securities. So, the [quantitative easing] was probably ill-advised at the time."
Currently, the yield on the 10-year Treasury note has been increasing, largely due to investors considering potential expansionary fiscal policies from Washington anticipated in 2025. This rise in yield is influencing the signals sent from the market for mortgage-backed securities, which directly impact the rates on new mortgages. Economists at Fannie Mae suggest that the Fed's management of its mortgage-backed securities portfolio is contributing to today's mortgage rates.
Quantitative easing, used by the Fed during the pandemic, reduced the spread between mortgage rates and Treasury yields, resulting in more affordable loan terms for home buyers. Conversely, quantitative tightening could exert upward pressure on this spread, potentially leading to higher mortgage rates. George Calhoun, director of the Hanlon Financial Systems Center at Stevens Institute of Technology, noted:
"I think that's one of the reasons the mortgage rates are still going in the wrong direction from the Federal Reserve's standpoint."
The Federal Reserve's ongoing adjustments include lowering its interest rate target three times in 2024, yet these measures have not provided the expected relief for homeowners. Jordan Jackson, a global market strategist at J.P. Morgan Asset Management, offered insight into the current situation:
"I think the best case scenario is we're going to continue to see mortgage rates hover around six and a half to 7%."
"So unfortunately for those homeowners who are looking for a bit of a reprieve on the mortgage rate side, that may not come to fruition."