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Fed Comments Help Mortgage Rates
Investors viewed the news from the Fed this week as favorable for mortgage rates. A very light economic data contained no major surprises and had little impact. As a result, mortgage rates ended the week a little lower.
Following comments from Fed officials this week, attention has turned to the Fed's plans for its enormous bond portfolio. After years of bond purchases to boost the economy, the Fed owns close to two trillion dollars of mortgage-backed securities (MBS). Investors expect that the Fed will continue to steadily taper its purchases of additional bonds, ending the program around the end of the year. At that point, the Fed's balance sheet will stop growing.
A remaining question is how long the Fed will replace balance sheet runoff (principal payments, prepayments, and maturing securities) to hold the size of its portfolio steady. So far, the Fed has been replacing runoff with new MBS. Prior to this week, the Fed had given little guidance about the timing of future policy changes in this area. This week, Fed officials indicated that they may continue replacing runoff for a long time, possibly even after the first fed funds rate hike. This would mean more MBS purchases by the Fed than had been previously anticipated, which was favorable for mortgage rates.
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