Mortgage rates to fall despite cut in Fed MBS holdings

The reduction in MBS held on the Fed’s balance sheet is, for now, set to continue in 2019. But while the announcement of MBS purchases in late 2008 led to a sharp drop in mortgage rates, we don’t think its reversal will boost rates today. A gradual reversal is not going to shake confidence in the financial system, and mortgage rates will fall to 4.3% over the next year even as Fed MBS holdings are slowly wound down.