The Fed lowered its interest rate target three times in 2024.
As a result, many Americans are waiting for lower mortgage rates. But that may not happen for a while.
“I think the best-case scenario is for mortgage rates to continue to hover around 6.5% to 7%,” said Jordan Jackson, global market strategist at JPMorgan Asset Management. “Unfortunately for homeowners who are looking for some relief on their mortgage rates, that may not happen,” Jordan said in an interview with CNBC.
Mortgage interest rates can be influenced by Federal Reserve policy. However, interest rates are more closely related to long-term borrowing rates on government debt. of 10 year government bond yield Interest rates have been rising in recent months as investors consider more expansionary fiscal policy that could come from Washington in 2025. This, along with signals from the mortgage-backed securities market, determines the interest rates at which new mortgages will be issued.
Fannie Mae economists say the Fed’s management of its portfolio of mortgage-backed securities may be contributing to today’s mortgage rates.
Amid the pandemic, the Fed has purchased large amounts of assets, including mortgage-backed securities, to adjust supply and demand dynamics within the bond market. Economists also refer to this method as “quantitative easing.”
Quantitative easing narrows the spread between mortgage interest rates and government bond yields, making loan terms cheaper for home buyers. It can also provide an opportunity for owners looking to refinance their mortgages. The Fed’s use of this technique during the pandemic drove mortgage rates to record lows in 2021.
“They were very active in buying mortgage-backed securities in 2021. [quantitative easing] It probably wasn’t wise at the time,” said Matthew Graham, chief operating officer of Mortgage News Daily.
In 2022, the Federal Reserve began a program to reduce its holdings, primarily to allow holdings to mature and “roll off” the balance sheet. This process, known as “quantitative tightening,” could put upward pressure on the spread between mortgage rates and Treasury yields.
“I think this is one of the reasons why mortgage rates are still going in the wrong direction from the Federal Reserve’s perspective,” said George Calhoun, director of the Hanlon Center for Financial Systems at the Stevens Institute of Technology.
Watch the video above to see how the Fed’s decision will affect mortgage rates.
