The Federal Reserve purchased $22.686 billion in agency mortgage-backed securities (MBS) during the week from July 9 to July 15, up from its $21.685 billion in the previous week.
The New York Federal Reserve Bank announced the purchase, adding the central bank did not sell any of its MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae during this period. In the previous week, the Fed sold $3.6 billion worth of MBS.
The Fed’s balance sheet has swelled from $4.2 trillion at the beginning of March to $7.2 trillion by mid-June. Bloomberg columnist Christopher Maloney observed that “volatility has plunged 67% from its decade-plus high seen before quantitative easing resumed March 16, and is now well below its trailing five-year average. That benefits MBS investors as the chance of a borrower having an incentive to refinance is in part a function of interest rate volatility over the life of the loan.”
Anthony B. Sanders, Professor of Real Estate Finance in the School of Business at George Mason University, echoed Maloney’s observations in his Confounded Interest blog while pointing out a silver lining for the housing market in the current environment.
“Ten-year Treasury Note volatility remains low as the Fed continues to flood the market with liquidity,” Sanders wrote. “The good news is that mortgage rates are at historic lows. More COVID = more economic shutdowns = more Fed intervention = lower mortgage rates.”
But how long can the Fed maintain this strategy? An analysis published by Wells Fargo’s Research Team concluded the Fed “likely will continue to use the asset side of its balance sheet as needed to support the continued recovery of the U.S. economy, and the liability side will largely adjust in a mechanical fashion.”
However, Wells Fargo also predicted that if the economy suffered another downturn, “then the FOMC likely would increase the size of the balance sheet sharply in an effort to support economic activity as much as possible.”
As for the Fed itself, Chicago Fed President Charles Evans told the audience at a virtual event yesterday that the central bank plans to stay its course for the foreseeable future.
“I am hard-pressed to think of reasons why we would need to move away from accommodative monetary policy unless inflation was well above 2% for an extended period of time, and the economy was just very different from what we are seeing right now,” said Evans during the presentation offered by the Global Interdependence Center. “That doesn’t seem to be very likely.”