In 2024, the Federal Reserve made the decision to decrease its interest rate target on three separate occasions. This has led to widespread anticipation among US citizens, who are eagerly waiting for a drop in mortgage rates. However, this anticipated decline may not materialize as quickly as they hope.
Jordan Jackson, a renowned global market strategist at J.P. Morgan Asset Management, shared his insights on the subject. He speculated that mortgage rates would likely maintain their position around the six and a half to 7% mark. Consequently, homeowners hoping for some relief in terms of mortgage rates may be left waiting.
While Federal Reserve policies can have an impact on mortgage rates, the rates are more intimately connected to long-term borrowing rates for government debt. The yield of the 10-year Treasury note, for instance, has seen a recent upward trend. This is as investors anticipate more growth-oriented fiscal policies from Washington in the coming year, 2025. Combined with the indicators from the market for mortgage-backed securities, this helps to determine the rates assigned to new mortgages.
According to economists from Fannie Mae, the management of the Fed’s mortgage-backed securities portfolio could influence present-day mortgage rates. During the pandemic, the Fed resorted to purchasing vast quantities of assets, including mortgage-backed securities, in a bid to regulate the demand and supply dynamics within the bond market. This practice, commonly referred to as ‘quantitative easing’, can narrow the gap between mortgage rates and Treasury yields, thereby providing more affordable loan terms for home buyers.
In 2022, the Federal Reserve initiated plans to scale down the balance of its holdings. This was primarily achieved by allowing these assets to mature and gradually get eliminated from its balance sheet, a process known as ‘quantitative tightening.’ This approach could potentially increase the difference between mortgage rates and Treasury yields.
According to George Calhoun, director of the Hanlon Financial Systems Center at Stevens Institute of Technology, this could be a key reason why mortgage rates are not aligning with the Federal Reserve’s expectations.
For a more in-depth understanding of how the Federal Reserve’s actions influence mortgage rates, take a look at the video attached above.
