Anyone whose living is influenced by interest rates, such as an Orion broker, knows that throughout most of the Federal Reserve’s history it never purchased securities for its own portfolio. But with the financial crisis the Fed stepped in, creating Quantitative Easing (QE) and buying both Treasury and mortgage-backed securities containing agency (namely Fannie & Freddie) loans. That programhas ended, and last week we learned that the Federal Reserve is now raising short term rates. But what will it do with its current MBS portfolio, and how might that impact mortgage rates?

The Federal Open Market Committee is now taking steps to “normalize” policy. The Fed looks likely to continue its practice of reinvesting maturing securities as it begins to raise rates. The continuation of reinvesting money from loans that pay off early stems from the fear of inciting another move in the financial markets, similar to the taper tantrum in 2016 by appearing to tighten policy earlier than currently anticipated.

The Federal Reserve’s members were in agreement, for most part, of raising the target Fed Funds rate by .250 percent. The release of the minutes from recent meetings also sheds light on what may be the Fed’s preferred tools when eventually raising the target rate.

The two major factors influencing mortgage rates at this point are inflation and Russia’s war against Ukraine. Inflation, at multi-decade highs, is a big focus of the Federal Reserve. At its current levels, inflation at the consumer and producer price levels is causing instability, something the Federal Reserve does its best to combat. And Russia’s war is causing economic instability around the world, something that every central bank in each country is trying to fight.

What does all this mean for Orion’s brokers and your borrowers? The primary message is that the Fed appears to be handling rates in a thoughtful, rational manner, that its moves are already priced into the market, and that long-term rates (for mortgages) aren’t going to be surprised by anything that the Fed does. That is good news indeed, despite all indications pointing toward higher mortgage rates. Fortunately, Orion has some great, low-rate options for your clients.

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