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The Federal Reserve took pressure off mortgage rates Wednesday by announcing that it will slow down the pace at which it sheds government debt from its books to $5 billion a month starting in April, down from the current pace of $25 billion a month.
Wrapping up its second meeting of the year, Fed policymakers indicated they’re more worried about inflation than they were in December and aren’t ready to resume cuts to short-term interest rates initiated last year.
The Fed’s latest summary of economic projections showed policymakers have a weaker outlook for growth and the job market but that inflation will trend back up in the near term, Mortgage Bankers Association Chief Economist Mike Fratantoni said.
Rather than cut short-term rates, the central bank is pulling back on “quantitative tightening” — an unwinding of its massive holdings of Treasurys and mortgage-backed securities that the Fed bought during the pandemic to keep interest rates low and prevent the economy from crashing.
“We have seen some signs of increased tightness in money markets,” Fed Chair Jerome Powell said of the decision. The Fed will continue to allow its mortgage holdings to shrink at the current pace, and the decision “has no implications for our intended stance of monetary policy and should not affect the size of our balance sheet over the medium term.
Mike Fratantoni
While Fed policymakers left their target for short-term federal funds rate at 4.25 percent to 4.5 percent, as expected, “the most significant change to policy at this meeting was a decision to markedly slow the pace of quantitative tightening beginning in April,” Fratantoni said, in a statement. “A slower pace of [quantitative tightening] will prevent further liquidity strains in financial markets.”
Rates on 10-year Treasury notes, a barometer for mortgage rates, dropped seven basis points from Wednesday’s high of 4.32 percent following the announcement by Fed policymakers. Rates on 30-year fixed-rate mortgages tracked by Mortgage News Daily were down more modestly, falling two basis points.
While surveys show consumers are increasingly worried that tariffs imposed by the Trump administration will mean higher prices in the months ahead, Powell said it’s difficult to measure what effect tariffs have had so far and whether they’ll be transitory.
At a press conference following Wednesday’s meeting, Powell said inflation in the price of goods “moved up pretty significantly in the first two months of the year,” but “trying to track that back to actual tariff increases — what was tariff and what was not — is very, very challenging.”
Asked about recent surveys that show consumer confidence is eroding, Powell said they reflect uncertainty and that Fed policymakers will “be watching very carefully for signs of weakness in the real data.”
The Fed’s shrinking balance sheet
The Fed’s cumulative Treasury and MBS holdings peaked at $8.5 trillion in May 2022, and since then the central bank has trimmed $2 trillion in assets from its books.
When the central bank first reversed course and began tightening, it set a goal of trimming $60 million in Treasurys and $35 billion in mortgage-backed securities (MBS) from its balance sheet each month, a cumulative reduction of $95 billion a month.
Although Fed policymakers said Wednesday that they’ll continue to let up to $35 billion in MBS roll off the books every month, they’ve not been hitting that target because too few homeowners are willing to refinance at current rates. Rather than sell Treasurys and MBS, the Fed’s quantitative tightening strategy has been to passively shrink its balance sheet by not replacing assets that mature.
The Fed dialed back the pace of tightening for Treasurys to $25 billion a month last spring and has only been able to cut its mortgage holdings by about $15 billion a month.
With the Fed scaling back the pace of Treasury rolloffs to $5 billion a month in April, quantitative tightening will total $20 billion a month — less than one-fourth of the $95 billion goal in 2022.
The move to slow Treasury rolloffs was opposed by Fed Governor Christopher Waller, who in the past has expressed frustration with the slow pace of the MBS rolloffs and said he’d like to see the Fed reduce its mortgage holdings to zero.
But achieving the Fed’s $35-billion-a-month MBS rolloff target would require it to abandon its passive strategy and start selling mortgages. Real estate industry groups would like Fed policymakers to publicly commit to not selling MBS because of the risk that those sales would push mortgage rates higher.
Mortgage rates bounce from March 3 bottom
After declining from a 2025 peak of 7.05 percent to hit a low for the year of 6.55 percent on March 3, rates on 30-year fixed-rate mortgages have been headed back up, according to rate lock data tracked by Optimal Blue.
Bond market investors who fund most mortgages have been demanding higher yields as progress in bringing down inflation slows, reducing the likelihood of Fed rate cuts.
Although the Fed cut short-term rates by a full percentage point in the final months of 2024, futures markets tracked by the CME FedWatch tool show investors don’t expect the Fed to start cutting rates again until June.
The latest Fed “dot plot” shows 11 Fed policymakers still expect to make two rate cuts this year, down from 15 in December.
But policymakers’ expectations that unemployment will only rise to 4.4 percent this year may prove to be overly optimistic, Pantheon Macroeconomics Chief Economist Samuel Tombs said.
“The hawkish shift in the dots jars with the revisions to the economic forecasts,” Tombs said in a note to clients. “Ultimately, we think this dot plot will quickly become stale, and expect the deteriorating trend in the labor market to become members’ main focus before long.”
Forecasters at Pantheon Macroeconomics continue to expect the Fed to cut rates three times this year to address unemployment and make the same number of cuts in 2026 to bring rates down by a total of 1.5 percentage points.
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