Fed decision could lower stagnant mortgage rates

Are mortgage rates about to drop again?

Right now, they're the lowest they've been in a year: 6.19%.

But mortgage rates have been stuck above 6% for the last three years in the post-pandemic economy. 

Hence, frustrated Americans priced out of the stagnant housing market have been anxiously waiting and watching to see what the Federal Reserve would do.

The Fed does not set mortgage rates directly, but its balance sheet helps influence them. 

Here’s what the Fed interest-rate cut does

The benchmark Federal Funds Rate sets the short-term rate for overnight lending between commercial banks. 

The Fed’s new target for the benchmark Federal Funds Rate is 3.75% to 4.00% effective Oct. 29.

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This is the second quarter-point cut of 2025.

It comes as the independent central bank attempts to balance its dual mandate from Congress — price stability and maximum employment — without the critical monthly leading economic indicators that are frozen due to the government shutdown.

Quantitative Tightening (QT) vs.Quantitative Easing (QE)

As of the week ending Oct. 22, the Fed’s total assets (its balance sheet size) stood at approximately $6.59 trillion or roughly 22% of U.S. nominal GDP.

The Fed can change the number of bonds it owns on its balance sheet.

• During QT, the Fed reduces its balance sheet by selling or letting these bonds mature, taking money out of the system.
• During QE, the Fed buys bonds and mortgage-backed securities to inject money into the economy and push long-term rates lower (which usually helps mortgages).

Related: Zillow reveals surprising mortgage rate change

"Interest rate cuts aren't the only tool at the Fed's disposal to lower credit-card, auto, and mortgage rates," said veteran market analyst Todd Campbell, who is also co-editor of TheStreet.com.

"Its decision to reduce bonds on its balance sheet over the past few years has kept lending rates higher, so an end to quantitative tightening could save borrowers big money," Campbell said.

What the Fed’s balance sheet looks like now

The Fed has been a net seller of Treasuries since 2022 by choosing not to reinvest proceeds from the maturing bonds on its balance sheet, pressuring rates higher, and in turn, elevating borrowing rates, including mortgages.

• When the Fed stops buying or begins selling bonds, private investors must step in, often demanding higher yields to compensate for risk.
  
• That pushes mortgage rates higher, even if the Fed is cutting short-term interest rates at the same time.

FOMC pivots on balance sheet decision

The Federal Open Market Committee announced Oct. 29 that it would “conclude the reduction of its aggregate securities holdings’’ effective Dec. 1.’’

Fed Chair Jerome Powell told reporters that the decision would give markets “a little bit of time to adapt.”

The decision “to stop the runoff now” is so that " mortgage-backed securities “could be re-invested in Treasury bills,’’ Powell said.

“We’re at that place,” Powell said of the decision. There’s “not a lot of benefit’’ otherwise, he added.

Lower mortgage rates could be next

Robert Conzo, CEO and managing director of The Wealth Alliance, said that while the Fed has two mandates for full employment and price stability, managing its balance sheet appears to be becoming more of a focus.

With the Fed announcing that it will end its QT cycle, Conzo said, “This new initiative may lead to lower long-term rates, thereby reducing mortgage and business loan costs.”

“Additionally, the end of QT would lead to less upward pressure on bond yields and could improve liquidity in bond markets, though the actual impact on rates will depend on other factors like inflation and market sentiment,’’ Conzo said. 

In addition to lower mortgage rates, Conzo said there could be a boon for small businesses.

“As small businesses are more interest-rate sensitive than mega cap companies, this could be a further tailwind to help small caps as well as the overall equity market in the future,’’ he added. 

Related: Fed Chair Powell's surprising words may cause mortgage rate tumble