Written by: Internal Analysis & Opinion Writers
The Federal Reserve’s move toward ending quantitative tightening (QT)—its large‑scale reduction of Treasury and mortgage‑backed security holdings—is sparking interest in how the housing finance market might respond. According to commentary in the industry, the conclusion of QT could potentially pave the way for lower mortgage rates, though timing and magnitude remain uncertain.
QT began in earnest after the pandemic, when the Fed’s balance sheet swelled to around $9 trillion. Over subsequent years, the central bank has allowed more than $2 trillion in Treasuries and MBS to roll off the books, helping tighten liquidity and support its policy of higher interest rates. As the pace of run‑off slows and the Fed signals a near end of QT, market participants are asking: what happens to mortgage rates?
One key mechanism: when the Fed reduces its holdings of mortgage‑backed securities, the supply of those securities in the open market increases, which can raise yields and, by extension, mortgage rates. Conversely, ending QT could ease this upward supply pressure, helping spreads narrow and rates soften—if other conditions cooperate (for example, steady inflation and calm bond markets).
Housing industry analysts suggest that if QT ends—or slows meaningfully—mortgage rates could dip into the mid‑6 % range, assuming long‑term Treasury yields also move lower. The rationale: less supply pressure, combined with improved liquidity and investor demand for MBS, could reduce the cost of fixed‑rate mortgages.
That said, the relationship isn’t automatic. Mortgage rates depend more directly on investor sentiment, inflation expectations, and long‑term bond yields than on the Fed’s overnight rate or balance‑sheet process alone. If inflation surprises to the upside or liquidity remains constrained, mortgage rates might stay elevated even after QT ends.
The timing also matters. Even if the Fed signals the end of QT in the coming months, markets may have already priced much of the effect in. That means meaningful rate relief for borrowers might only come once spreads tighten, investor risk appetite improves, and mortgage lending picks up—conditions that historically lag the policy shift by months.
For lenders, originators, and borrowers, the message is clear: the conclusion of QT could create a favorable backdrop for mortgage activity, but expecting a dramatic rate drop immediately could be overly optimistic. Instead, incremental improvements—lower spreads, modest rate relief, improved affordability—are the likely path.
