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by afiedler
3702 days ago
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The zero interest rate definitely does contribute, but a bigger deal for mortgage rates is that the Fed continues to buy $24-26 billion a month in mortgage-backed securities. It is keeping its total holdings of MBS constant, but since total holdings are still over $1.7 trillion, that results in a lot of purchases each month to cover the reduction in principal from people paying off mortgages in existing MBS. This article has a good explaination: http://www.cnbc.com/2015/12/16/why-the-fed-move-doesnt-matte... |
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I think you've got the right idea, but you are misinterpreting things slightly. Purchasing MBS contributes to ZIRP (as opposed to serving a separate policy objective). MBS are interest rate products based on mortgages instead of US Government credit (although you can view MBS as a US Treasury + some spread). In sustaining purchases of MBS (supporting their price), the Fed drives down their yields (note that yields necessarily move inversely with price). In effect, these purchases result in lower interest rates and go hand in hand with ZIRP.
> that results in a lot of purchases each month to cover the reduction in principal from people paying off mortgages in existing MBS.
I'm not sure what you mean by this. A person's principal is only changed when she makes a payment on the principal. Fed's purchases will affect the yield on the MBS.