The Federal Reserve cut its interest rate target three times in 2024.
This leaves many Americans waiting for mortgage rates to fall. But that may take some time.
“I think the best case scenario is that mortgage rates will continue to be around six and a half to seven percent,” said Jordan Jackson, global market strategist at JP Morgan Asset Management. “Unfortunately, this may not come to fruition for homeowners looking for a little relief on the mortgage rate side,” Jordan said in an interview with CNBC.
Mortgage rates can be influenced by Fed policy. However, the interest rates are more closely linked to the long-term borrowing rates for government debt. The 10-year Treasury note yield has risen in recent months as investors consider more expansionary fiscal policies that could come from Washington in 2025. This, combined with signals from the mortgage-backed securities market, determines interest rates on new mortgages.
Fannie Mae economists say the Fed's management of its mortgage-backed securities portfolio could be contributing to today's mortgage rates.
During the pandemic, the Fed purchased massive amounts of assets, including mortgage-backed securities, to adjust demand and supply dynamics in the bond market. Economists also refer to the technique as “quantitative easing.”
Quantitative easing can narrow the spread between mortgage rates and government bond yields, resulting in more favorable credit terms for homebuyers. It can also provide opportunities for homeowners looking to refinance their mortgages. The Fed's use of this technique during the pandemic sent mortgage rates to record lows in 2021.
“They have been particularly aggressive in purchasing mortgage-backed securities in 2021 [quantitative easing] was probably ill-advised at the time,” said Matthew Graham, COO of Mortgage News Daily.
In 2022, the Federal Reserve began plans to reduce its holdings, primarily by allowing these assets to mature and “rolling down” its balance sheet. This process is called “quantitative tightening” and can put upward pressure on the spread between mortgage rates and Treasury yields.
“I think that's one of the reasons mortgage rates are still going in the wrong direction from the Federal Reserve's perspective,” 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.