Confronted with persistently high housing costs, the Trump administration is directly bypassing the Federal Reserve, utilizing administrative power to intervene in the mortgage market in an attempt to lower mortgage rates by "hedging" against the Fed's balance sheet reduction. On January 9th local time, US Treasury Secretary Beshent, during a media interview in Minnesota, elucidated the core logic behind the Trump administration's latest round of financial intervention policies. He stated that the US government's directive for Fannie Mae and Freddie Mac to purchase mortgage-backed securities (MBS) aims to roughly match the pace at which these bonds are rolling off the Federal Reserve's balance sheet. Beshent pointed out that the Federal Reserve currently has approximately $15 billion in MBS maturing each month without reinvestment (i.e., "balance sheet reduction"), leading to a continuous decline in MBS holdings within the Fed's massive $6.3 trillion bond portfolio. He argued that this Fed action effectively exerts counter-pressure on the market, hindering further declines in mortgage rates. Consequently, the Trump administration's strategy is to use the purchasing power of the "GSEs" to fill this demand gap left by the central bank.
So, I think our idea is to roughly keep pace with the Fed, because the Fed has been working in the opposite direction.
Previously, President Trump formally ordered the Federal Housing Finance Agency (FHFA), which regulates the GSEs, to purchase $200 billion in MBS on Thursday. FHFA Director William Pulte confirmed on Friday that they had initiated the first round of purchases, totaling $3 billion. This directive has been interpreted by the market as an aggressive move by the White House to address the housing affordability crisis, while also marking a rare intrusion of executive power into a financial market domain traditionally led by the central bank. MBS prices have surged, and mortgage rates are expected to fall by 0.25 percentage points. Since Trump announced the directive, the market reaction has been intense. Trump's quantitative easing policy has caused mortgage-backed security (MBS) prices to skyrocket, prompting a rapid market repricing.
The risk premium (spread) of MBS relative to US Treasuries has narrowed significantly by about 0.18 percentage points since Thursday's close. In the interview, Beshent acknowledged that while purchases funded by the GSEs' balance sheets are unlikely to directly and substantially lower mortgage rates, they can produce an indirect effect by compressing the yield spread between MBS and US Treasuries. Analysts note that although the $200 billion purchase scale appears moderate compared to the Fed's multi-trillion-dollar quantitative easing (QE) programs, it is still substantial enough to exert meaningful pressure on the market. According to Bloomberg, citing analyst views, this move could potentially lower mortgage rates by up to 0.25 percentage points. Currently, the average rate for a 30-year fixed mortgage in the US has decreased from nearly 8% in 2024 to around 6.2%, yet it remains significantly higher than the 3% level seen during the pandemic. Rob Zimmer, External Affairs Director of the Community Home Lenders of America, stated that this policy would benefit first-time homebuyers, as younger buyers have long been penalized by the excessively high spread between mortgage funding costs and the price of 10-year Treasury notes. Administrative intervention raises concerns about "Federal Reserve independence." Although the market has welcomed the liquidity injection, the investment community is divided on the policy's long-term implications, with discussions about the Fed's role becoming increasingly heated. Typically, regulating interest rates across the broad economy has historically been the Federal Reserve's responsibility. The Fed was designed specifically to be insulated from political interference. Beyond setting short-term borrowing costs, the central bank sometimes intervenes through large-scale purchases of Treasury bonds and mortgage-backed securities (MBS), but this is usually limited to specific circumstances, such as restoring liquidity to stressed markets or providing stimulus during severe economic downturns. Baird & Co. strategist Kirill Krylov warned in a client report that Trump's directive blurs the line between market-driven utility and political manipulation. He argued that purchasing assets explicitly to manipulate mortgage rates reintroduces political risk into a market that has tried to distance itself from such practices for over a decade. Jeffrey Gordon, Co-director of the Center for Global Markets and Corporate Ownership at Columbia Law School, pointed out that while these purchases might be defended under the guise of "housing affordability"—a goal outside the Fed's mandate—the mortgage market is tightly linked to overall interest rate policy. The executive branch taking action equivalent to a form of quasi-monetary policy sets a new precedent and is undermining the Federal Reserve's independence. In fact, the Federal Reserve currently holds just over $2 trillion in MBS, a legacy of stimulus measures during past crises. However, these holdings have been shrinking for over two years at a pace of $15 to $17 billion per month. The Trump administration's move is seen as opening a new front after public pressure on the Fed to cut rates failed to yield results, signaling the White House's willingness to act unilaterally if monetary policy does not swiftly align with administrative goals. The future of the GSEs becomes even more uncertain. This policy also adds further ambiguity to the future direction of Fannie Mae and Freddie Mac. The Trump team had previously discussed reprivatizing these two companies, which were taken over by the government during the 2008 financial crisis. Beshent insisted that the purchase actions would not harm the GSEs' financial health, claiming the companies have ample cash and that this move might even increase their earnings. However, Vitaliy Liberman, a portfolio manager at DoubleLine Capital, noted that the market had assumed an IPO meant the government would fully return them to the public via a public offering, but current signals suggest this might not happen. The government has realized that the GSEs are important policy tools, and once fully released into the free market, the government would lose this control. Strategists at JPMorgan Chase also believe there is a fundamental tension between the government's desire to use Government-Sponsored Enterprises (GSEs) as policy levers and the traditional expectations of private investors. Clearly, there exists a difficult-to-reconcile contradiction between the current target interest rates and the future profitability of the GSEs.
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