The Federal Reserve has been accused of tightening monetary policy to combat inflation in headlines for months. Multiple rate rises and portfolio reductions have resulted as a result, and forward projection indicates additional moves will follow.
The federal funds rate has increased by the Federal Reserve from 0.25 to 0.50 percent to 3.00 to 3.25 percent from March 2022. Market expectations suggest that two additional interest rate increases are anticipated before the end of the year: 75 basis points in November and 50 basis points in December. These predictions are contingent on Federal Reserve direction. By allowing mortgage and US Treasury securities to run off, the Federal Reserve has also decreased the size of its securities holdings. The portfolio cuts started in June, and the Fed will move to.
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As a result, market rates have increased significantly this year. The 10-year Treasury rate increased by 265 basis points, from 1.43 percent in late 2021 to 4.08 percent during the week ending October 20, 2022. In addition, the rate for 30-year fixed-rate mortgages climbed by 383 basis points, from 3.11 percent in late 2021 to 6.94 percent for the week ending October 20. This rise was 44 percent greater than the change in the Treasury rate.
The “mortgage spread,” or the difference between the rate on 30-year fixed-rate amortizing mortgages and the rate on 10-year Treasury notes, two products with equal price sensitivity, has expanded significantly as a result of these sharp rate increases. Mortgage spreads are actually approaching levels that were evident during the early stages of the COVID-19 outbreak and have surpassed that difference.
