Trump wants to "manage mortgage rates" for the Federal Reserve? Bessenet stated that the goal of "Trump QE" is to match the Federal Reserve's "balance sheet reduction."

In the face of persistently high housing costs, the Trump administration directly bypassed the Federal Reserve and used executive power to intervene in the mortgage market, attempting to lower mortgage rates by "hedging" against the Fed's balance sheet reduction.

On January 9th local time, U.S. Treasury Secretary Steven Mnuchin elaborated on the core logic of the Trump administration's latest round of financial intervention policies during a media interview in Minnesota. He stated that the U.S. government directed Fannie Mae and Freddie Mac to purchase mortgage-backed securities (MBS) to roughly match the pace at which these bonds are flowing out of the Federal Reserve's balance sheet.

Mnuchin pointed out that the Federal Reserve is currently not reinvesting about $15 billion in MBS each month (i.e., "balance sheet reduction"), which has led to a continuous decline in the MBS holdings within the Fed's massive $6.3 trillion bond portfolio. He believes that this action by the Fed is effectively exerting reverse pressure on the market, hindering further declines in mortgage rates. Therefore, the Trump administration's strategy is to utilize the purchasing power of the "two GSEs" to fill the demand gap left by the central bank.

So I think, our idea is to roughly keep pace with the Federal Reserve, as the Fed has been working in the opposite direction.

Previously, President Trump officially ordered the Federal Housing Finance Agency (FHFA), which regulates the "two GSEs," to purchase $200 billion in MBS. FHFA Director William Pulte confirmed on Friday that they have initiated the first round of a $30 billion purchase plan. This directive has been interpreted by the market as an aggressive move by the White House to address the housing affordability crisis, while also marking a rare intervention of executive power into a financial market traditionally dominated by the central bank.

MBS Prices Soar, Mortgage Rates Expected to Drop by 0.25 Percentage Points

Since Trump announced the directive, the market has reacted strongly.

Trump's quantitative easing policy has led to a surge in mortgage-backed securities (MBS) prices, with the market quickly repricing.

The risk premium (spread) of MBS relative to U.S. Treasuries has significantly narrowed by about 0.18 percentage points since Thursday's close. Mnuchin acknowledged in the interview that while the purchasing actions funded by the "two GSEs" balance sheets are unlikely to directly and significantly lower mortgage rates, they can have an indirect effect by compressing the yield spread between MBS and U.S. Treasuries.

Analysts pointed out that although the $200 billion purchase scale seems modest compared to the Federal Reserve's multi-trillion dollar quantitative easing (QE) program, it is still sufficient to exert substantial pressure on the market. According to analysts cited by Bloomberg, this move could lead to a decrease in mortgage rates of up to 0.25 percentage points. Currently, the average interest rate for a 30-year fixed mortgage in the U.S. has dropped from nearly 8% in 2024 to around 6.2%, but it is still far above the 3% level during the pandemic Rob Zimmer, the Director of External Affairs at the Community Home Lenders of America, stated that this policy will benefit first-time homebuyers, as young buyers have long been penalized by the excessive spread between the cost of mortgage funding and the price of 10-year Treasury bonds.

Administrative Intervention Raises Concerns Over "Federal Reserve Independence"

Although the market welcomed the liquidity injection, there are divisions in the investment community regarding the long-term impact of this policy, especially as discussions about the role of the Federal Reserve become increasingly heated.

Generally speaking, regulating interest rates across a broad range of economic areas has traditionally been the responsibility of the Federal Reserve. The Federal Reserve was designed to be insulated from political interference. In addition to setting short-term borrowing costs, the central bank sometimes intervenes through large-scale purchases of Treasury bonds and mortgage-backed securities (MBS), but this is usually limited to specific situations, such as restoring liquidity to pressured markets or providing stimulus during severe economic downturns.

Baird & Co. strategist Kirill Krylov warned in a report to clients that Trump's directive blurred the line between market-driven efficacy and political manipulation. He believes that explicitly purchasing assets to manipulate mortgage rates reintroduces political risk into a market that has been trying to distance itself from such practices for over a decade.

Jeffrey Gordon, co-director of the Center for Global Markets and Corporate Ownership at Columbia Law School, pointed out that while these purchases may be defended in the name of "housing affordability," the mortgage market is closely tied to overall interest rate policy. The administration's actions, which amount to a form of monetary policy, set a new precedent and are undermining the independence of the Federal Reserve.

In fact, the Federal Reserve currently holds just over $2 trillion in MBS, a legacy of the stimulus measures taken during past crises. However, this holding has been shrinking at a rate of $15 billion to $17 billion per month for the past two years. The Trump administration's move is seen as a new front opened after failing to publicly pressure the Federal Reserve into lowering interest rates, suggesting that if monetary policy does not quickly align with administrative goals, the White House is willing to take unilateral action.

New Variables in the Privatization Prospects of "Two GSEs"

This policy has also made the future direction of Freddie Mac and Fannie Mae more uncertain. The Trump team had previously discussed re-privatizing these two companies, which were taken over by the government during the 2008 financial crisis. Baird insisted that the purchasing actions would not harm the financial condition of the "Two GSEs" and claimed that both companies have ample cash, and this move could even increase their earnings.

However, Vitaliy Liberman, a portfolio manager at DoubleLine Capital, pointed out that the market originally believed that an IPO meant the government would fully return them to the public through a public offering, but the current signals indicate that this may not happen. The government has realized that the "Two GSEs" are important policy tools, and once they are fully released into the free market, the government will lose that control JP Morgan's strategists also believe that there is a fundamental tension between the government's desire to use Government-Sponsored Enterprises (GSEs) as a policy lever and the traditional expectations of private investors. There is clearly an irreconcilable contradiction between the current target interest rates and the future profitability of the "two houses."