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Wall Street Expects the Fed to Support the Mortgage Market Until 2022, Goldman Sachs Says

mortgage rates federal reserve

The Federal Reserve bond-buying program that last year pushed U.S. mortgage rates below 3% for the first time probably will be around for the rest of 2021, according to a Goldman Sachs survey of the expectations of Wall Street clients.

More than half of respondents to the investment bank’s July QuickPoll said they believe the Fed won't begin tapering purchases of Treasuries and mortgage bonds until next year. The results of the survey, based on a poll of 1,077 of Goldman Sachs’ institutional investor clients, were published on Friday.

Mortgage rates began plummeting in March 2020 after Fed Chairman Jerome Powell said the central bank would buy unlimited amounts of Treasuries and agency-backed mortgage securities to keep the credit markets from drying up as the onset of the pandemic shocked the U.S. economy.

That promise later evolved to the Fed’s current commitment to buy $120 billion of bonds a month, including $80 billion of Treasuries and $40 billion of mortgage-backed securities. Both types of asset purchases result in downward pressure on home-loan rates because Treasuries are used as a benchmark by mortgage-bond investors.

Mortgage rates fell to an all-time low of 2.65% in January’s first week, a percentage point below the 3.65% peak seen in the days before the Fed’s March 2020 announcement, as measured by Freddie Mac’s survey of the average U.S. 30-year fixed home-loan rate that dates back to 1971.

As rates fell to new lows more than a dozen times last year, it sparked a demand for housing that sent property prices spiraling upward at a record pace. The refinancing market also boomed, with $2.89 trillion of refis in 2020, more than double the $1.14 trillion seen in 2019.

Powell’s asset-purchase plan is a redux of the bond-buying program the Fed created more than a decade ago to counter the credit crunch brought on by the 2008 financial crisis. The first phase of what was then called quantitative easing, or QE, began in December 2008 and helped to drive mortgage rates below 5% for the first time ever.

While Wall Street investors don’t make monetary policy decisions, the rate-setting Federal Open Market Committee is loathed to counter the expectations of the markets. For example, when mortgage rates spiked more than a percentage point during May and June of 2013 because of investor fears about the Fed ending its first bond-buying program, the Fed delayed its tapering plans.

Bond markets tend to act in advance – these are, of course, long-term investments, so investors make decisions based on expectations. Most of the bond side of the “taper tantrum,” as Wall Street called it, happened before the June 19 announcement by Ben Bernanke, then the Fed chairman, that the central bank could announce at its September meeting that it would begin scaling back bond purchases and might end the program by mid-2014. After Bernanke’s remarks, the stock markets joined in the panic with a 4.3% drop over the subsequent three trading days.

Based on those reactions, the Fed pulled back and announced at its September 2013 meeting that it would hold off its tapering plans. Three months later the central banks said they would begin winding down bond purchases the following year.

In an example of the Fed’s current desire to avoid upsetting the markets, the minutes of the FOMC's June meeting published on Wednesday showed the central bank had conducted its own survey of bond-tapering expectations. Investors expect the Fed to begin winding down bond purchases in the fourth quarter of 2021 or the first quarter of 2022, the minutes said, citing a survey conducted by the central bank.

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