What will the Fed do with mortgage rates?


Wednesday afternoon is one of 8 regularly scheduled Federal Reserve (also known as the Fed) policy updates for the year. While there is No questions that the Fed’s policy has a significant impact on all types of interest rates, the Fed does not actually “set” mortgage rates. The only limited exception would be for certain lines of credit, which are regulated based on the PRIME rate, which in turn is based on the federal funds rate (what the Fed actually “sets”). Even if the federal funds rate had a lot to do with mortgage rates (which it doesn’t), there’s no chance they’ll announce a rate hike this week, let alone this year.

So why do we care about the Fed? Why have we seen such big jumps in mortgage rates after certain Fed statements in the past?

As for the mortgage market, then the biggest reason care is the Fed’s massive bond buying programs. Here, too, no changes are expected at this meeting, BUT changes are coming soon. Probably. Federal Reserve officials have frankly discussed the process of curtailing the bond purchase program this fall. Powell himself recently said that these negotiations will continue in the form of a meeting this week, including a discussion of cutting purchases of mortgage-backed bonds at an even faster pace than Treasuries.

Understand that if the Fed had simply announced a hard end to its bond buying program this week, rates runway strip the fastest pace in recent years. If traders can even adjust their working estimates of when and how a narrowing could occur, this could have a significant impact on the market. After all, roughly half of the rate spike associated with the taper hysteria in 2013 was in place before the taper was actually announced.

Bottom linemarket participants simply want to refine their understanding of how and when the Fed can act. Today’s rates already reflect everything we think we can know about it. If the Fed says something to make it look like buying bonds will take a little longer (or that talk about cutting MBS before the end of Treasury bonds), rates could fall even lower. On the other hand, if the Fed says that the recent spike in coronavirus cases was on their radars and that there was no revision of the narrowing targets by the end of 2021, rates could definitely go up.

In any case, such “pop” would mean something historically incredibly low and do it just a little less incredible–at least for now. Larger steps are reserved for a fall when several important covid-related unknowns can be better appreciated.

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