Federal Reserve Chair Jerome Powell has said the central bank will not intervene in secondary mortgage markets to ease mortgage rates, ruling out an idea some have floated to increase affordability for homebuyers.
Speaking on Tuesday at the National Association for Business Economics conference in Philadelphia, Powell discussed the Fed’s progress with “quantitative tightening,” or the effort to reduce the more than $6 trillion of securities it holds on its balance sheet.
Those holdings include some $2 trillion in mortgage-backed securities (MBS), which are bundles of home loans that are packaged together and sold to investors, usually by middlemen Fannie Mae and Freddie Mac.
The Fed dramatically increased its MBS purchases during the COVID-19 pandemic in order to ensure a steady supply of mortgage credit for homebuyers. But after those holdings peaked at around $2.7 trillion in 2022, the Fed has allowed them to roll off the balance sheet as they hit maturity, gradually shrinking the central bank’s investment in MBS.
However, some bond market experts have suggested that the Fed should instead reinvest in new MBS as older holdings mature, or even increase its holdings, as a way to bring down stubbornly high mortgage rates.
Investment executives Marc Seidner and Pramol Dhawan from PIMCO, one of the world’s largest bond investment firms, recently argued that the Fed could quickly reduce mortgage rates by 20 to 30 basis points by simply reinvesting the roughly $18 billion in MBS that hit maturity each month.
That’s roughly the same reduction for mortgage rates that could be achieved by cutting the federal funds rate a full percentage point, they argue.
Seidner and Dhawan also believe the Fed could lower mortgage rates by up to 50 basis points with a more aggressive approach, by selling off older MBS each month and using the funds to purchase newly packaged mortgage bundles.
The Fed’s MBS holdings potentially impact mortgage rates through the simple laws of supply and demand: by buying up more MBS, the central bank would reduce the supply available to investors, driving prices of the securities up and the expected interest payments down.
The idea has gained traction in some quarters as a potential solution for persistently high mortgage rates, which have remained stuck above 6% for three straight years and contributed to multi-decade lows for housing affordability.
Mortgage rates averaged 6.3% last week, according to Freddie Mac, virtually the same as a year ago—with the Fed’s ongoing MBS run-off believed to be a factor in the stickiness of mortgage rates.
However, Powell rejected the suggestion of using MBS purchases to ease mortgage rate during a Q&A session in Philadelphia, saying “we look at overall inflation…we don’t target housing prices.”
“We would certainly not engage in mortgage backed security purchases as a way of addressing mortgage rates or housing directly. That’s that’s not what we do,” he said. “We do have, as I mentioned, a very large amount of mortgage backed securities, and they’re running off, but they run off pretty slowly.”
Powell’s comments came as little surprise to Realtor.com® Senior Economist Jake Krimmel, who noted that “direct intervention could blur the Fed’s apolitical stance and be seen as picking winners in a certain sector.”
“Powell’s categorical rejection of using MBS purchases to lower mortgage rates is entirely consistent with how he approaches his role as Fed chair. He has a disciplined and increasingly narrow reading of the dual mandate and remains laser focused on that right now, especially given the risks on both sides of the mandate,” says Krimmel.
The economist noted that Powell has repeatedly described the housing crisis as a structural challenge for the economy, not one that the Fed could or should solve. Instead, Powell has cited the shortage of housing, exacerbated by local zoning restrictions, as the key factor, in the affordability crisis.
“Powell does not view high mortgage rates as a problem for monetary policy to solve right now, especially when homeowners are sitting on record levels of home equity and inflation risks remain,” says Krimmel.
Developing story, more to follow.