Minutes from the Federal Reserve's January 27-28 meeting, released on Wednesday, indicate that an initiative by the Trump administration to purchase mortgage-backed securities has had a measurable effect on market yields but little impact on housing affordability to date.
According to the minutes, a New York Fed official - the person charged with implementing policy operations - briefed meeting participants that the administration's purchase plans produced "a notable decline in mortgage-backed securities yields relative to those on comparable-maturity Treasury yields." That shift in relative yields was confirmed in the briefing, but the official added that the move was unlikely to produce a material uptick in mortgage refinancing activity because "current mortgage rates are well above the weighted average rate of outstanding mortgages."
The New York Fed official's assessment reflects the views expressed by private-sector analysts cited in the minutes, who acknowledged that the administration's announced $200 billion plan at the start of the year had altered market behavior to some degree, but not in a way that would materially change the underlying dynamics of the troubled housing sector.
Fed participants, as recorded in the minutes, reiterated that the primary constraint in the housing market is not the affordability of financing but the shortage of available homes. The minutes state that until supply increases, the affordability challenges that affect the sector - which accounts for the majority of household borrowing - are likely to persist.
The minutes also highlighted that the largest single contributor to lower mortgage rates over the period has been the Federal Reserve's earlier easing of short-term credit costs. Officials cut their policy rate target by three quarters of a percentage point last year, bringing the target range to between 3.5% and 3.75% - a move the minutes identify as the biggest driver of downward pressure on mortgage rates.
At the time of the minutes, the Fed was maintaining its policy rate, awaiting clearer evidence that inflation was on a sustained downward path. Market participants, the minutes note, continued to expect that further rate cuts could come later in the year.
On operational matters, the New York Fed official described recent revisions to standing repurchase operations as having made the tool more attractive to financial institutions. The minutes indicate that these changes affected the usage of the standing repo facility, thereby assisting the Fed's management of its interest rate target.
The document further reports that large-scale purchases of Treasury bills designed to lift reserve balances ahead of the mid-April tax date were proceeding as planned. Reserve levels were expected to fluctuate around the $3 trillion level heading into that period. The minutes frame the added Treasury bill purchases as technical steps to ensure money markets have sufficient cash so that short-term rates trade in line with the Fed's desired range.