Federal Reserve to End Quantitative Tightening: What It Means for Mortgage Rates
The Federal Reserve (the U.S. central bank, not the government itself) has announced it will end quantitative tightening (QT), effective December 1, 2025, which is effectively a pause in monetary policy tightening rather than a full shift to quantitative easing (QE).
Ending quantitative tightening (QT) is expected to put downward pressure on mortgage rates, though the effect may be gradual rather than immediate. The end of QT could lead to a more stable mortgage-backed securities (MBS) market, lower long-term Treasury yields, and improved liquidity, all of which can make mortgages more affordable. However, the actual outcome will depend on other factors like inflation, market sentiment, and the Federal Reserve’s other actions.
Potential positive impacts
- Lower long-term rates: Ending QT reduces the supply of government debt that the Fed is no longer buying, which can help lower long-term Treasury yields.
- Improved MBS market: The Fed will no longer be shrinking its holdings of mortgage-backed securities, which can increase demand and potentially reduce the spread between mortgage rates and Treasury yields.
- Increased liquidity: As the Fed’s balance sheet normalizes, there could be more liquidity in bond markets, potentially benefiting both mortgage and business loan costs.
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Lower borrowing costs: These factors combined could lead to a gradual decline in mortgage rates.
Factors to watch
- Inflation: If inflation surprises to the upside, it could counteract the downward pressure on rates.
- Market sentiment: Investor sentiment and risk appetite play a significant role in mortgage rates, and if markets become worried, rates could stay elevated.
- Timing: The market may have already “priced in” the end of QT, meaning that a meaningful drop in rates might not happen immediately and could take months to materialize.
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Other Fed actions: The Federal Reserve’s other monetary policies, such as changes to the federal funds rate, will also influence mortgage rates.
