Trump to "manage mortgage rates" for the Fed? Bessent states: The goal of "Trump QE" is to match the Fed's "balance sheet reduction."

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Faced with persistently high housing costs, the Trump administration has bypassed the Federal Reserve and used executive power to intervene in the mortgage market, attempting to “hedge” the Fed’s balance sheet reduction in order to lower mortgage rates.

On January 9 local time, U.S. Treasury Secretary Bassent clarified the core logic of the Trump administration’s latest round of financial intervention policies in an interview in Minnesota. He stated that the U.S. government instructed Fannie Mae and Freddie Mac to purchase mortgage-backed securities (MBS) with the aim of roughly matching the speed at which these bonds are flowing out of the Federal Reserve’s balance sheet.

Bassent pointed out that currently about $1.5 billion of MBS matures each month and is no longer reinvested by the Federal Reserve (i.e., “balance sheet reduction”), leading to a continuing decline in the MBS holdings of the Fed’s vast $6.3 trillion bond portfolio. He believes that this operation by the Fed is actually exerting reverse pressure on the market, hindering further declines in mortgage rates. Therefore, the Trump administration’s strategy is to use the purchasing power of “the two housing agencies” to fill the demand gap left by the central bank.

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

Previously, President Trump officially ordered the Federal Housing Finance Agency (FHFA), which regulates the “two agencies,” to purchase $200 billion in MBS on Thursday. FHFA Director William Pulte confirmed on Friday that they have already launched a first round of $3 billion in purchases. The market interpreted this directive as an aggressive move by the White House to address the housing affordability crisis, and as a rare intervention of executive power into a financial market field traditionally dominated by the central bank.

MBS Prices Surge, Mortgage Rates Expected to Fall by 0.25 Percentage Points

Since Trump’s announcement, the market reaction has been intense.

Trump’s quantitative easing policy has caused mortgage-backed securities (MBS) prices to soar, with the market quickly repricing.

The risk premium (spread) of MBS over U.S. Treasuries narrowed by about 0.18 percentage points compared to Thursday’s close. Bassent admitted in the interview that although purchases funded by the “two agencies’” balance sheets are unlikely to directly and dramatically lower mortgage rates, they can have an indirect effect by compressing the yield spread between MBS and U.S. Treasuries.

Analysts point out that although the $200 billion purchase size seems modest compared to the Fed’s multi-trillion dollar quantitative easing (QE) programs, it is still enough to put substantial pressure on the market. According to analysts cited by Bloomberg, this move could lower mortgage rates by up to 0.25 percentage points. Currently, the average 30-year fixed mortgage rate in the U.S. has fallen from nearly 8% in 2024 to about 6.2%, but it remains far above the 3% level seen during the pandemic.

Rob Zimmer, head of external affairs at the Community Home Lenders of America, said this policy will benefit first-time homebuyers, as young buyers have long been penalized by the excessive spread between mortgage funding costs and 10-year Treasury prices.

Administrative Intervention Raises Concerns Over “Fed Independence”

Although the market welcomed the liquidity injection, investors are divided over the long-term impact of this policy, particularly as debate over the Fed’s role has intensified.

Normally, the role of regulating broad economic interest rates has always been the duty of the Fed. The Fed was designed to be insulated from political interference. In addition to setting short-term borrowing costs, the central bank sometimes also intervenes by purchasing large amounts of Treasuries and mortgage-backed securities (MBS), but this is typically reserved for limited circumstances, such as restoring market liquidity under stress or stimulating the economy during severe downturns.

Baird & Co. strategist Kirill Krylov warned in a report to clients that Trump’s directive blurs the line between market-driven functionality and political manipulation. He believes that explicitly purchasing assets to manipulate mortgage rates reintroduces political risk to a market that has avoided such practices for over a decade.

Jeffrey Gordon, co-director of the Center on Global Markets and Corporate Ownership at Columbia Law School, noted that while these purchases may be justified in the name of “affordability” outside the scope of the Fed’s duties, the mortgage market is closely tied to overall interest rate policy. Such actions by the executive branch amount to a de facto monetary policy, set a new precedent, and are weakening the Fed’s independence.

In fact, the Fed currently holds just over $2 trillion in MBS—a legacy of past crisis-era stimulus. However, such holdings have declined at a pace of $15–17 billion per month over the past two years. The Trump administration’s move is seen as opening a new front after public pressure on the Fed to cut rates failed, suggesting that if monetary policy fails to accommodate administrative goals quickly, the White House is willing to take unilateral action.

Privatization Prospects for “Two Agencies” Grow More Uncertain

This policy also brings new uncertainty to the future of Fannie Mae and Freddie Mac. The Trump team has previously discussed re-privatizing these two companies, which were taken over by the government during the 2008 financial crisis. Bassent insisted that the purchases would not harm the financial health of the “two agencies,” and claimed that both companies have ample cash and this move could even increase their returns.

However, DoubleLine Capital portfolio manager Vitaliy Liberman pointed out that the market originally believed an IPO would mean the government would fully return them to the public through a public offering, but the signals now suggest this may not happen. The government has realized that the “two agencies” are important policy tools, and fully releasing them to the free market would mean losing that control.

Strategists at JPMorgan also believe that the government’s desire to use government-sponsored enterprises (GSEs) as policy levers is fundamentally at odds with traditional expectations of private investors. There is a clear and irreconcilable tension between current target interest rates and the future profitability of the “two agencies.”

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