Federal Reserve Chair Jerome Powell has said the central bank will not directly intervene in secondary mortgage markets to ease mortgage rates, ruling out an idea favored by some 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 as part of its “quantitative easing” program. 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.
The Fed’s MBS holdings affect mortgage rates through the simple laws of supply and demand: By buying up MBS, the Fed increases demand for mortgages, raising their value. This incentivizes the creation of more mortgages, and mortgage rates drop as lenders compete for a piece of the market.
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.
Their 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 multidecade 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 runoff believed to be a factor in the stickiness of mortgage rates.
However, during a Q&A session on Tuesday, Powell rejected the suggestion of using MBS purchases to ease mortgage rates.
“We look at overall inflation. … We don’t target housing prices,” he said.
“We would certainly not engage in mortgage-backed security purchases as a way of addressing mortgage rates or housing directly. 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 notes that direct intervention in mortgage markets falls outside of the Fed’s dual mandate to maintain stable prices and maximum employment.
“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 notes that Powell has repeatedly described the housing crisis as a structural challenge for the economy, and 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. “Direct intervention could blur the Fed’s apolitical stance and be seen as picking winners in a certain sector.”
Powell defends pandemic MBS buying spree
In his prepared remarks in Philadelphia, Powell also responded to accusations that the Fed contributed to soaring home prices during the COVID-19 pandemic-era homebuying mania by loading its balance sheet with MBS.
Home values in the U.S. surged 37% in just 24 months from March 2020, when the Fed began buying up MBS, through March 2022, when the Fed’s balance sheet began to stabilize, according to the Case-Shiller Home Price Index.
Some economists have argued that the Fed’s MBS buying spree was an overlooked factor in the overheated housing market, by stoking investor demand for new mortgages that led to lower mortgage rates and a frenzy of purchases.
Powell, however, said that the Fed’s primary intent in purchasing MBS was to ease broader financial conditions when the central bank’s overnight interest rate was stuck at 0%, limiting further action through the Fed’s main policy tool.
“The extent to which these MBS purchases disproportionately affected housing market conditions during this period is challenging to determine,” he said. “Many factors affect the mortgage market, and many factors beyond the mortgage market affect supply and demand in the broader housing market.”
Although Powell defended the buying spree, the central banker admitted that it may have gone too far, after inflation soared to a 40-year high, with housing costs a key contributor to overall price increases.
“With the clarity of hindsight, we could have—and perhaps should have—stopped asset purchases sooner,” he said. “Our real-time decisions were intended to serve as insurance against downside risks.”
