How the Federal Reserve's rate policy affects mortgages

cnbc.com:

The Federal Reserve lowered its interest rate target three times in 2024.

This has many Americans waiting for mortgage rates to fall. But that may not happen for some time.

«I think the best case scenario is we're going to continue to see mortgage rates hover around six and a half to 7%,» said Jordan Jackson, a global market strategist at J.P. Morgan Asset Management. «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,» Jordan said in an interview with CNBC.

Mortgage rates can be influenced by Fed policy. But the rates are more closely tied to long-term borrowing rates for government debt. The 10-year Treasury note yield has beenincreasing in recent months as investors consider more expansionary fiscal policies that may come from Washington in 2025. This, combined with signals sent from the market for mortgage-backed securities, determine the rates issued within new mortgages.

Economists at Fannie Mae say the Fed's management of its mortgage-backed securities portfolio may contribute to today's mortgage rates.

In the pandemic, the Fed bought huge amounts of assets, including mortgage-backed securities, to adjust demand and supply dynamics within the bond market. Economists also refer to the technique as «quantitative easing.»

Quantitative easing can reduce the spread between mortgage rates and Treasury yields, which leads to cheaper loan terms for home buyers. It can also provide opportunities for owners looking to refinance their mortgages. The Fed's use of this technique in the pandemic brought mortgages rates to record lows in 2021.

«They were extra aggressive in 2021 with buying mortgage-backed securities. So, the [quantitative