Mortgage rates are more likely to go up than down in March.
Blame the Federal Reserve.
As for the Russian invasion of Ukraine, the effects are so
unpredictable that I won't begin to guess the implications for mortgage rates.
War could impel investors toward buying safe investments like mortgage-backed
securities, which would cause mortgage rates to fall. But a spike in fuel
prices could cause inflation to rise, nudging mortgage rates higher.
March is a pivotal month for the Federal Reserve, as it
begins in earnest to pull interest rates upward using two techniques.
The first consists of raising the federal funds rate, which
is an interest rate that banks charge one another for overnight loans. When you
read articles that say the Fed is raising interest rates, they're usually
referring to the federal funds rate.
This overnight rate is important because it acts as a floor
for other interest rates. Mortgage rates are set by market forces and don't
react directly to the ups and downs of the federal funds rate. Sometimes
mortgage rates initially move in the opposite direction, for example, falling
immediately after a surprise Fed increase. But in the longer run, mortgage
rates tend to move in the same direction as the federal funds rate.
The Fed's second technique consists of expanding or
shrinking its vast government and mortgage debt holdings. During the pandemic,
the central bank expanded these holdings to stabilize the financial system and
reduce interest rates. By mid-February, the central bank owned $5.7 trillion in
U.S. Treasurys (government debt) and $2.7 trillion in mortgage-backed securities.
Now the Fed wants to reduce those holdings. However, it has
to do so carefully because interest rates could rise fast if the Fed acts
aggressively. The central bank is aware that mortgage rates jumped in late 2021
after the Fed took the mild action of reducing its monthly debt purchases.
The central bank's monetary policy committee is scheduled to
meet March 15-16. It's expected to increase the federal funds rate to fight
inflation. March is also when the Fed plans to stop buying government and
mortgage debt altogether.
The Fed is likely to reduce those debt holdings passively at
first. It won't replace government bonds as they mature or mortgage bonds as
the loans are paid off. But eventually, the Fed will reduce its holdings
actively by selling them. That could force all kinds of interest rates higher.
Fed policymakers have been arguing publicly over the timing of these sales —
whether they should begin in a few months or a couple of years.
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