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Chrisman's Corner: Does the Federal Reserve's Actions, or Lack of Action, Move Mortgage Rates?

JMAC hears from its brokers that borrowers sometimes believe the mortgage interest rates are set by the Federal Reserve. After all, it meets regularly (it is meeting this week), Chairpersons Ben Bernanke and now Janet Yellen are well-known – so they must be important! Our brokers often tell their borrowers they should know that the Fed is mainly charged with setting short term rates (as short as overnight) but also helping to ensure that the U.S. economy is on sound footing. One of their tactics has been Quantitative Easing, or QE, whereby the Fed goes out and buys securities (Treasury and mortgage-backed bonds) to help create demand for them, boost their price, and help stability.

But the Fed has announced it is scaling back this program – and as they do, will mortgage rates go up? The fear was that as the Fed pulled out of the market for the securitized government loans that currently dominate lending, there would not be enough private investors to replace it as a buyer. Reduced demand would theoretically decrease the prices of government-related mortgage-backed securities prices and thus increase their yields, which in turn would push up consumer mortgage rates.

Rates indeed climbed to a new, higher range on the news that the Fed planned to reduce its MBS purchases last year. But now that the actual tapering of its so-called quantitative easing program has begun there is very little concern that rates will soar into the stratosphere. For one thing, fewer people are buying homes or refinancing, so the supply of mortgage-backed securities is down, so the Fed doesn’t have to buy as much. And private investors have continued to show an appetite for MBS as these bonds have remained attractive compared to competing Treasury investments.

The Fed is slated to stop new purchases by year-end and thereafter decide how to deal with the runoff from the existing portfolio. And even if the Fed goes back to buying $0 of securities, as was its policy in “the old days,” that doesn’t mean it can’t buy again – they can step back in if the economy really falters. But there are plenty of signs that the economy is regaining its footing in the region covered by JMAC’s brokers, so at this point the experts think that the Fed can safely return to not buying securities, and mortgage rates will not directly suffer.