Ways Trump Can Control Mortgage Rates
Written by
G. Brian Davis
Edited by
Zuri Anderson
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President Donald Trump hasn’t exactly been subtle in his attempts to lower interest rates by pressuring the Federal Reserve. Even before trying to fire Fed governor Lisa Cook, the president has a long history of insults and threats against Fed chair Jerome Powell, as outlined by Fox Business.
Of course, Fed governors have limited terms, and the administration has already nominated one new board member. Powell’s tenure as chairman ends in May.
That said, the Fed doesn’t control mortgage rates. It controls the federal funds rate: The short-term interest rate that banks use to lend each other money. While mortgage rates share a historical correlation with the federal funds rate, they’re actually based on Treasury yields.
In fact, reduced Fed independence will likely push Treasuries up, not down.
“Once the Fed loses the trust of the markets, long-term yields will spike, as bond investors demand higher yields due to higher inflation expectations,” explains Josh Lewis, mortgage consultant with The Educated Homebuyer.
The president can’t control Treasury yields. But he could pull a few other levers of government to influence mortgage rates.
Pressure the Fed To Buy Treasuries
The Federal Reserve can artificially juice demand for Treasury bonds by buying them. And with more buyer demand comes lower yields. Lewis said the Fed pulls these sorts of maneuvers all the time.
“In ‘Operation Twist’ for example, the Fed sold short-term bonds and bought longer maturities, which pulled 10-year yields — and mortgage rates — lower without touching the fed funds rate,” he stated.
Pressure the Fed To Buy Mortgage-Backed Securities
The government could come at the problem from another direction: Artificially juicing demand for mortgage-backed securities (MBS). Again, more demand means private markets will accept lower rates.
“Even if the Fed simply slows its runoff of already-owned mortgage-backed securities, supply shrinks, spreads decrease and Main Street gets lower mortgage rates,” notes Lewis.
Remove Caps on MBS for Fannie and Freddie
The president has floated the idea of privatizing Fannie Mae and Freddie Mac, which would drive mortgage rates higher as investors perceive higher risk. But if the administration really wants to lower rates, they could take a more clever and nuanced approach.
Back in the 2008 financial crisis, the government placed caps on the amount of mortgage-backed securities that Fannie and Freddie could buy and own. The Trump administration could simply remove those caps, allowing Fannie and Freddie to buy more MBS. That boost in demand would compress mortgage spreads and rates.
Final Take To GO
Ultimately, the president can’t control investors however, and the Fed determine yields and rates.
Charles Urquhart, professor of finance at Loyola University and financial advisor with Fixed Income Resources, observes that the more interference investors detect, the higher the yields they’ll demand.
“Trump could inject himself further into the monetary policy process and likely push rates higher as investors price in more inflation and fiscal risk,” according to Urquhart.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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