The U.S. central bank has made large purchases of U.S. Treasuries and mortgage-backed securities as a way to provide liquidity to financial markets during the pandemic.
Study published in Symposium in progress Jackson Hole shows that the fall in interest rates and asset purchases by the Federal Reserve (The Fed, the American central bank) increased the volume of new mortgages during the pandemic United States to about $3 trillion.
As the virus kept everyone at home, the Fed cut rates, as did other central banks, to combat the effects of Covid-19 on the world’s largest economy. The Fed also made massive purchases of US Treasuries and mortgage-backed securities (MBS) as a way to provide liquidity to financial markets during the pandemic.
The study’s authors estimate that both actions were responsible for a roughly 40 basis point reduction in mortgage spreads, or the difference banks pay to borrow and charge to lend, in 2020 and 2021.
“This has led to a cumulative increase in mortgage originations of approximately $3 trillion. [nos EUA] and a net issuance of mortgage-backed securities of about $1 trillion, of which about half is attributable to banks,” calculate economists Itamar Drechsler, Alexi Savov, Philipp Schnabl and Dominik Supera, in a study published during the Jackson Hole Symposium, sponsored by the Kansas City Fed, in the USA.
According to them, these effects have had a “big impact” on American consumer spending and also on residential investment in the United States during Covid-19.
The focus of the analysis was precisely to assess the impact of monetary policy on the mortgage segment in the United States, isolating effects such as, for example, the demand for housing due to working from home, which exploded during the pandemic as a way to control the spread of the virus.
“Monetary policy has had a strong impact on mortgage markets by altering the supply of mortgage credit by the two largest holders of the segment: banks and the Federal Reserve,” economists say.
On the Fed side, the effects are through the purchase or sale of mortgage-backed securities through the so-called quantitative easing and tightening programs (QE and QT). On the banks side, the push comes from deposits, which increase in the face of interest rate cuts and also because financial institutions invest these resources in MBS.
According to the authors, the Fed’s quantitative easing and tightening programs and the deposit channel played a major role not only in the expansion but also in the contraction of mortgage lending during the monetary policy cycle between 2020 and 2024, that is, during and after the financial crisis. pandemic. This is because, after lowering rates at the start of the pandemic, the Fed was forced to rapidly raise interest rates, from 0% to above 5% in the space of a year and a half, in the fastest and most aggressive monetary tightening in 40 years. years to combat the resulting price explosion.
When monetary policy reversed course, banks and the Fed reduced their mortgage holdings, causing rates to rise and spreads to widen, according to Drechsler, Savov, Schnabl, and Supera, in the paper.
“Monetary policy has therefore had a huge impact on mortgage rates,” they assess. “This explains why mortgage markets have been so central to the transmission of monetary policy,” they add.
According to the economists, the actions of the Fed and banks will continue to influence the effects of monetary policy on economies. “Looking ahead, our results suggest that the combined effects of the easing program and the deposit channel in the mortgage market will continue to be important for the transmission of monetary policy,” they conclude.
Source: Terra
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