The Fed has played a major role in consumer mortgage rates over the past decade and change.
Back in 2008, they began purchasing hundreds of billions in mortgage-backed securities (MBS). This was known as quantitative easing, or QE for short.
The goal was to drive interest rates lower and increase the money supply. Doing so would boost economic activity, aka lending, and help us out of the Great Recession.
But there were consequences to such a plan – namely something called inflation.
The Fed also knew it couldn’t hold onto these assets forever, but how would they unload without riling the markets?
Quantitative Easing Led to Raging Inflation
The Fed conducted four rounds of quantitative easing, which involved buying both MBS and U.S. treasuries.
The final round of QE extended all the way into 2020 as the COVID-19 pandemic dislocated the world economy.
In the process, mortgage rates hit all-time record lows. The 30-year fixed dipped as low as 2.65% during the week ending January 7th, 2021, per Freddie Mac.
And the 15-year fixed fell to 2.10% on July 29th, 2021. These low rates were unprecedented.
They were so cheap that they set off a housing market frenzy, with home prices rising nearly 50% from late 2019 to mid-2022.
Clearly this was unhealthy growth, and a symptom of easy money.
Fed Finally Takes Action to Cool the Housing Market
The Fed realized that they had an inflation problem. They also realized housing demand had gotten completely out of control.
Folks were buying homes for any price, thanks in huge part to the record low mortgage rates on offer.
It wasn’t just a housing supply issue, as some had pointed out. This meant they had the power to cool off the overheated housing market, simply by reversing course.
Once they finally took notice, quantitative tightening (QT) was implemented in mid-2022. It works the exact opposite way of QE.
Instead of buying, they’re selling. And this means unloading treasuries and MBS, albeit at a reasonable rate.
Without a big buyer of MBS, bond prices drop, yields rise, and mortgage interest rates extended to consumers go up.
No one could have guessed how much they’d rise in such a short period. That too was unprecedented.
Mortgage rates essentially doubled in a year, the first time that has happened on record.
The 30-year fixed ended 2022 at an…