Trump Administration's Potential Influence on Federal Reserve Policy: Mortgage-Backed Securities in Focus

The Trump administration is reportedly considering pressuring the Federal Reserve (Fed) to purchase mortgage-backed securities (MBS), which could initiate a significant decline in 30-year fixed mortgage rates—a drop of potentially more than 1 percentage point. This development comes amid ongoing discussions about economic stimulus measures to bolster the U.S. economy and housing market.

Mortgage Rates May Drop with Fed Intervention

Recent insights from Bank of America (BOA) Global highlight the potential effects of such a policy. In a report cited by MarketWatch, BOA stated, “If the Trump administration convinces the Fed to buy government-guaranteed MBS, mortgage rates could drop to the 5% range by next year.” This could have major implications for millions of homeowners.

Currently, the average 30-year fixed mortgage rate sits at approximately 6.35%. However, market conditions are showing signs of optimism. A decline in U.S. Treasury yields, coupled with a narrowing spread between MBS and Treasury securities, has created fertile ground for mortgage rate reductions. The yield on the benchmark 10-year Treasury note has fallen to 4.03%, and the spread between MBS rates and Treasury rates, which was 145 basis points (1.45%) earlier this month, has contracted to around 120 basis points.

Fed’s Role in Quantitative Easing: Is MBS Next?

The possibility of the Federal Reserve resuming MBS purchases as part of its quantitative easing (QE) strategies is increasingly being factored into market analyses. BOA's report indicated that the Trump administration might declare the current housing market challenges a national emergency to provide justification for such a move.

A political push to influence monetary policy would align with President Trump's broader goals. He has expressed interest in gaining significant leverage over the Fed’s Board of Governors, openly discussing his dissatisfaction with the Fed’s direction. BOA’s report added, “To push for lower rates before next year’s midterm elections, the administration may need to assert control over monetary policy decisions.”

Potential Refinancing Surge in the Mortgage Market

If mortgage rates drop into the 5% range, the effects could reverberate across the housing industry and beyond. A dramatic shift in rates would likely fuel a refinancing boom, offering significant relief to homeowners. Approximately 30% of U.S. mortgage loans currently carry interest rates above 5%, meaning millions of Americans could potentially benefit from reduced monthly payments through refinancing.

Treasury Secretary Scott Bessent recently emphasized the urgency of addressing the housing market crisis, stating, “We are considering all possible measures to address the housing market challenges and provide actionable solutions for homeowners facing pressure.”

Challenges to Federal Reserve Policy Shifts

Despite these possibilities, financial analysts remain cautious about the likelihood of the Fed shifting its balance sheet focus back toward MBS. Federal Reserve Chair Jerome Powell has previously expressed a preference for Treasury-focused operations, which diminishes the odds of significant policy movement toward MBS purchases without a major economic upheaval.

Nick Travaglino, a managing director at Nuveen, noted, “For the Fed to buy MBS again, there would need to be a severe economic shock. At present, this scenario appears unlikely.”

Moreover, Travaglino warned that reducing rates without resolving persistent housing supply shortages could inadvertently drive up home prices. This would exacerbate affordability issues for a large segment of the population, potentially undermining the policy’s intended benefits.

Exploring Alternative Housing Market Solutions

As skepticism surrounding direct Fed intervention remains, experts have proposed alternative measures to address housing market challenges. These include:

• Expanding Guarantees by Housing Finance Enterprises: Agencies like Freddie Mac and Fannie Mae could extend their guarantees to support market stability.
• Adjusting Guarantee Fees (G-Fees): Reducing G-Fees for first-time homebuyers could enhance affordability and help underserved populations.
• Improving Ginnie Mae Policies: Key reforms within Ginnie Mae’s frameworks may incentivize participation and drive market improvements.

Earlier this year, the MBS market experienced an influx of investor capital following the announcement of tariffs on Chinese goods, referred to as “Liberation Day Tariffs.” During this period, mortgage-backed securities gained favor as a relatively stable asset class, insulated from volatility. This renewed interest bolstered demand, creating further momentum for MBS stability in uncertain times.

Looking Ahead

The Trump administration’s potential influence on Federal Reserve policy, including its stance on MBS purchases, has sparked debates across financial and political circles. While analysts are cautious about significant near-term changes, the broader implications of lower mortgage rates and dynamic policy shifts remain topics of significant interest.

Market participants and homeowners will continue to closely monitor signals of evolving policies, Federal Reserve strategies, and economic conditions affecting mortgage rates and the U.S. housing market.