The Federal Reserve cut its interest rate target three times in 2024.
This has many Americans waiting for mortgage rates to fall. But this may not happen for some time.
“I think the best case scenario is that we will continue to see mortgage rates in the range of six-and-a-half to seven percent,” said Jordan Jackson, global market strategist at JPMorgan Asset Management. “So unfortunately for homeowners who are looking for a little bit of relief in terms of mortgage rates, that may not pay off,” Jordan said in an interview with CNBC.
Mortgage rates can be affected by Federal Reserve policy. But the rates are more closely linked to long-term borrowing rates on government debt. the 10-year Treasury bond yield Interest rates have been increasing in recent months as investors consider more expansionary fiscal policies that could come from Washington in 2025. This, combined with signals sent from the mortgage-backed securities market, determines the prices issued for new mortgages.
The Fed's management of its mortgage-backed securities portfolio may be contributing to today's mortgage rates, Fannie Mae economists say.
In light of the pandemic, the Fed has purchased massive amounts of assets, including mortgage-backed securities, to adjust the demand and supply dynamics within the bond market. Economists also refer to this technique as “quantitative easing.”
Quantitative easing can reduce the spread between mortgage rates and Treasury yields, leading to cheaper loan terms for homebuyers. It can also provide opportunities for owners looking to refinance their mortgages. The Fed's use of this technology during the pandemic sent mortgage rates falling to record lows in 2021.
“They were more aggressive in 2021 in buying mortgage-backed securities. So, (quantitative easing) was probably unwise at the time.” said Matthew Graham, Chief Operating Officer at Mortgage News Daily.
In 2022, the Fed launched plans to reduce the balance of its holdings, primarily by allowing those assets to mature and “roll over” its balance sheet. This process is known as “quantitative tightening,” and may add upward pressure to the spread between mortgage interest rates and Treasury yields.
“I think that's one of the reasons why mortgage rates are still going in the wrong direction from the Fed's perspective,” said George Calhoun, director of the Hanlon Center for Financial Systems at Stevens Institute of Technology.
Watch the video above to learn how the Fed's decisions affect mortgage rates.
