Mortgage Rates Remain High Despite Fed Rate Cuts: A Complex Equation
Despite the Federal Reserve lowering its interest rate target three times in 2024, many Americans are disappointed to find that mortgage rates remain stubbornly high. While the Fed’s actions influence mortgage rates, other significant factors, including the yield on 10-year Treasury notes and the Federal Reserve’s policies regarding quantitative easing and tightening, play a much more substantial role. Experts predict that these rates will likely stay in the 6.5% to 7% range for the foreseeable future, dashing hopes for a quick reprieve for potential homebuyers and those looking to refinance.
Key Takeaways: Why Mortgage Rates Aren’t Falling
- The Federal Reserve’s interest rate cuts haven’t translated into lower mortgage rates.
- Mortgage rates are more significantly impacted by the yield on 10-year Treasury notes, which recently increased due to expectations of expansionary fiscal policies.
- The Federal Reserve’s past policies of quantitative easing (QE) and quantitative tightening (QT) have had, and continue to have, a profound impact.
- The market for mortgage-backed securities also plays a critical role in determining mortgage rates.
- Experts predict mortgage rates to hover around 6.5% to 7% in the near future.
The Federal Reserve’s Actions and Their Limited Impact
The Federal Reserve’s decision to lower interest rates three times in 2024 was intended to stimulate the economy and potentially ease the burden on borrowers. However, the effect on mortgage rates has been minimal. This disconnect stems from the fact that while the Fed’s actions are a factor, they are not the primary driver of mortgage rates. Mortgage rates are more closely tied to long-term borrowing rates, specifically the yield on the 10-year Treasury note.
The Role of the 10-Year Treasury Note Yield
The 10-year Treasury note yield serves as a benchmark for long-term borrowing costs. In recent months, it has been rising, largely due to investor anticipation of potentially expansionary fiscal policies coming out of Washington, D.C. in 2025. This increase in the 10-year Treasury yield directly translates to higher mortgage rates, offsetting any downward pressure from the Fed’s rate cuts.
Mortgage-Backed Securities: A Key Player
Another significant factor influencing mortgage rates is the market for mortgage-backed securities (MBS). These securities are bundles of mortgages that are traded on the secondary market. The supply and demand dynamics within the MBS market significantly impact the rates offered on new mortgages. Changes in investor sentiment, economic expectations, and overall market conditions all play a role in shaping the MBS market and thus influencing mortgage rates.
The Legacy of Quantitative Easing and Tightening
The Federal Reserve’s past policies of quantitative easing (QE) and quantitative tightening (QT) have profoundly impacted the mortgage market. During the pandemic, the Fed engaged in large-scale QE, purchasing vast quantities of assets, including MBS, to inject liquidity into the market and lower borrowing costs. This led to record-low mortgage rates in 2021. This aggressive approach, while effective in its time, is viewed by some experts as “ill advised”.
Quantitative Easing and its Impact
QE’s effect on mortgage rates was substantial. By increasing demand for MBS, the Fed compressed the spread between mortgage rates and Treasury yields, making mortgages significantly cheaper for consumers. This created opportunities for both first-time homebuyers and existing homeowners to refinance their mortgages at more favorable rates.
Quantitative Tightening and its Current Influence
Conversely, the Fed’s shift to quantitative tightening (QT) in 2022, where it began reducing its balance sheet by allowing assets to mature without replacement, has contributed to higher mortgage rates. QT removes liquidity from the market, increasing the spread between mortgage rates and Treasury yields. This policy, designed to combat inflation, has inadvertently contributed to the current high mortgage rates, even as the Fed is now lowering its interest rate target. This is due to the long-lasting impact of QT’s removal of liquidity.
Expert Opinions
“They were extra aggressive in 2021 with buying mortgage-backed securities. So, the [quantitative easing] was probably ill-advised at the time,” stated Matthew Graham, COO of Mortgage News Daily, highlighting the potential unintended consequences of the Fed’s previous policies.
Echoing this sentiment, 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,” emphasizing the complex interplay between various economic factors affecting mortgage rates.
Jordan Jackson, a global market strategist at J.P. Morgan Asset Management, offered a sobering prediction for prospective homebuyers: “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,” indicating that immediate relief is unlikely.
The Fannie Mae Perspective: Mortgage-Backed Securities and Rate Volatility
Economists at Fannie Mae, a major player in the US mortgage market, point to the Fed’s management of its MBS portfolio as a significant contributor to current mortgage rate volatility. The Fed’s actions during the pandemic, while ultimately successful in stabilizing financial markets, continue to have ripple effects today. The sheer scale of the QE program and the subsequent QT measures created significant shifts in the supply and demand dynamics within the bond market.
Long-Term Implications
Understanding the interplay between the Federal Reserve’s monetary policy, the 10-year Treasury yield, the MBS market, and the legacy of QE and QT is crucial for anyone involved in or affected by the housing market. This complex equation doesn’t offer a simple solution, and prospective homebuyers and those looking to refinance should be prepared for the possibility that higher mortgage rates will persist for some time. It is crucial to remember that mortgage rates are not solely determined by the Federal Reserve’s actions; many interconnected factors contribute to this complex equation.
