The Federal Reserve cut its interest rate target three times by 2024.
As a result, many Americans are waiting for a drop in mortgage rates. But that might not happen for a while.
“I think the best-case scenario is that mortgage rates continue to hover around six and a half to seven percent,” said Jordan Jackson, global market strategist at JP Morgan Asset Management. “So unfortunately for the homeowners who are looking for a little bit of reprieve on the mortgage rate front, that may not work out,” Jordan said in an interview with CNBC.
Mortgage rates can be affected by Fed policy. But interest rates are more closely linked to long-term borrowing rates for government debt. The The yield on ten-year government bonds has increased in recent months as investors consider looser fiscal policy that could emerge from Washington in 2025. This, combined with signals coming from the mortgage-backed securities market, determines the interest rates issued under new mortgages.
Economists at Fannie Mae According to him, the Fed’s management of its mortgage-backed securities portfolio could contribute to current mortgage rates.
During the pandemic, the Fed has purchased massive amounts of assets, including mortgage-backed securities, to adjust supply and demand dynamics in the bond market. Economists also call the technique ‘quantitative easing’.
Quantitative easing can narrow the gap between mortgage rates and government bond rates, leading to cheaper lending terms for homebuyers. It can also provide opportunities for owners looking to refinance their mortgage. The Fed’s use of this technique caused the pandemic mortgage interest rates to record lows in 2021.
“They were extra aggressive in buying mortgage-backed securities in 2021 [quantitative easing] was probably unwise at the time,” said Matthew Graham, COO of Mortgage News Daily.
In 2022, the Federal Reserve initiated plans to reduce the balance of its assets, primarily by maturing these assets and rolling off its balance sheet. This process is known as ‘quantitative tightening’ and can put upward pressure on the difference between mortgage rates and government bond rates.
“I think this is one of the reasons that mortgage rates are still moving in the wrong direction from the Federal Reserve’s point of view,” said George Calhoun, director of the Hanlon Financial Systems Center at the Stevens Institute of Technology.
Watch the video above to see how the Fed’s decisions affect mortgage rates.