Kansas City Fed President Jeff Schmid has made wide-ranging remarks.
- Fed's Schmid says inflation too high, worrying that price rises becoming more widespread
- Fed's Schmid: Hard to know if stablecoin is anything different from Venmo on steroids
More now:
- Fed's balance sheet probably end this year close to US$6tln
- Current mortgage rates may be 60 to 80bps lower than otherwise due to Fed's MBS purchases
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Some background. Why the Fed buys MBS:
- The Fed began buying agency MBS (those guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae) during the 2008 financial crisis and expanded those purchases again during COVID-19.
- The goals were to:
- Support housing-market liquidity when private demand collapsed.
- Push down long-term borrowing costs (including mortgage rates) to stimulate homebuying and refinancing.
- Signal accommodative monetary policy beyond short-term rate cuts.
How MBS purchases lower mortgage rates, here’s the mechanism:
- The Fed buys large volumes of MBS, increasing demand for these bonds.
- Higher demand pushes up MBS prices, which lowers their yields.
- Since mortgage rates are closely linked to MBS yields, lower yields mean cheaper mortgage rates for borrowers.
Without the Fed’s buying, MBS investors would demand higher yields to compensate for prepayment and credit risks — pushing up mortgage rates. Empirical estimates from the Fed and other research bodies often find that its holdings reduce mortgage spreads by around 60–80 basis points (0.6–0.8 percentage points).
