Mortgage rates got room to come down Tuesday after Federal Reserve Chair Jerome Powell said central bank policymakers are open to another rate cut this month, and may soon put a halt to “quantitative tightening” that’s trimmed $2.2 trillion from the Fed’s balance sheet over the past three years.
Rates on 30-year fixed-rate mortgages dropped 4 basis points Tuesday, to 6.22 percent, and were down 8 basis points from last week’s high of 6.30 percent, according to lender data tracked by Optimal Blue. A basis point is one hundredth of a percentage point.
Homebuyer demand for purchase loans fell by a seasonally adjusted 3 percent last week compared to the week before, but demand is stronger than a year ago, the Mortgage Bankers Association (MBA) reported Wednesday.
Joel Kan
“Purchase applications declined for the third consecutive week but remained 20 percent ahead of last year’s pace as improving inventory conditions in certain markets continue to maintain homebuyer interest,” MBA Deputy Chief Economist Joel Kan said in a statement.
The MBA’s Weekly Mortgage Applications Survey showed requests to refinance were down 1 percent week over week and up 59 percent from a year ago. Requests to refinance accounted for more than half (53.6 percent) of all mortgage applications.
Mortgage rates nearing 2025 lows
Rates on 30-year fixed-rate conforming mortgages hit a 2025 low of 6.17 percent on Sept. 16, down nearly a full percentage point from the high for the year of 7.05 percent registered on Jan. 14.
Future markets tracked by the CME FedWatch tool on Wednesday put the odds of a modest, 25-basis point rate cut at the Fed’s Oct. 29 meeting at 98 percent, up from 94 percent on Oct. 8. Futures market investors see no chance of a jumbo 50-basis point reduction in the short-term federal funds rate.
In addition to the prospect of Fed easing, “ongoing brinksmanship surrounding the government shutdown could further catalyze lower mortgage rates” as stock market investors seek a safe haven in Treasurys and mortgage-backed securities, BTIG analyst Eric Hagen said in a note to clients.
The Fed doesn’t have direct control over long-term rates on government debt and mortgages. So after cutting the federal funds rate to almost zero at the outset of the pandemic, the central bank embarked on a “quantitative easing” campaign to bring down long-term rates by buying $4.6 trillion in government debt and mortgage-backed securities.
Fed has trimmed $2.2T from balance sheet
By the time it stopped its asset purchases in March 2022, the Fed’s balance sheet had grown to $8.5 trillion, including $5.76 trillion in Treasurys and $2.74 trillion in mortgage-backed securities (MBS).
When quantitative easing was in full swing at the outset of the pandemic, it helped push mortgage rates to historic lows.
Addressing a National Association for Business Economics conference in Philadelphia on Tuesday, Powell said the market for U.S. Treasurys “was under extraordinary pressure and on the verge of collapse” when the Fed launched quantitative easing.
“Faced with unprecedented market dysfunction, the Fed purchased Treasury and agency securities at an extraordinary pace in March and April of 2020,” Powell said. “These purchases supported the flow of credit to households and businesses and fostered more accommodative financial conditions to support the recovery of the economy when it ultimately came.”
The Fed reversed course in June 2022, launching a “quantitative tightening” program that lets Treasurys and MBS run off the balance sheet.
Having reduced the Fed’s balance sheet by $2.2 trillion, the Fed is nearing the point where it can put the brakes on tightening, for now.
“Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions,” Powell said. “We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision.”
The Fed has already scaled quantitative tightening back from the original target of $95 billion a month, dialing down the pace of balance sheet trimming to $40 billion a month last year and to $30 billion in April.
Quantitative tightening works passively — instead of selling Treasurys and MBS, the Fed simply refrains from buying new assets to replace investments that mature.
While the Fed’s current target is to allow $5 billion in Treasurys and $25 billion in MBS to roll off the books every month, the slow pace of mortgage refinancing has meant the central bank has only been able to trim its mortgage holdings by about $15 billion a month.
When mortgage rates were approaching post-pandemic highs in 2023, housing industry groups asked the Fed to stop trimming its mortgage holdings altogether to take pressure off of rates.
Asked on Tuesday if the Fed would consider taking that kind of action now to bring down mortgage rates and improve housing affordability, Powell said that’s not why the Fed purchases MBS.
“We look at overall inflation, we don’t target housing prices,” Powell 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.”
Having brought the federal funds rate down close to zero, Powell said the Fed bought mortgages for the same reason it buys Treasurys — “to ease broader financial conditions.”
Powell acknowledged that the Fed has also come under fire for buying MBS during the pandemic, with critics saying lower mortgage rates helped drive home prices up.
“The extent to which these MBS purchases disproportionately affected housing market conditions during this period is challenging to determine,” Powell said. “Many factors affect the mortgage market, and many factors beyond the mortgage market affect supply and demand in the broader housing market.”
But in hindsight, Powell acknowledged that the Fed “could have—and perhaps should have—stopped asset purchases sooner. Our real-time decisions were intended to serve as insurance against downside risks. We knew that we could unwind purchases relatively quickly once we ended them, which is exactly what we did.”
Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.
