Federal Housing Finance Agency

The Effects of Monetary Policy on Mortgage Rates Federal Housing Finance Agency

Publisher Marketing: Economic events over the past decade have changed central bank policies in the United States and around the world. The housing and nancial markets experienced signi cant changes as the markets rst surpassed historical highs and then underwent a recession grave enough to draw comparison with the Great Depression. To spur recovery, the Federal Reserve rst lowered short-term interest rates to near-zero and eventually embarked on several phases of large-scale asset purchases (LSAPs) to lower long-term interest rates and mortgage rates. This paper describes the evolution of the LSAP program and analyzes how interest rates and mortgage rates changed during that time. Both the long-term interest rates and mortgage rates reached historical lows in the post crisis period, primarily due to the Federal Reserve Board's accommodative policies. Two econometric approaches an event study and a time series model estimate the market response during each phase of the LSAP program and provide projections of mortgage rates under different shock assumptions. Results suggest that early tapering announcements helped reset interest rates and mortgage rates upwards and any rise in long-term interest rates resulting from unanticipated events (whether related to tapering or not) could lead to further increases in mortgage rates.