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.
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