How Does the Federal Reserve's Large‐Scale Asset Purchases (LSAPs) Influence Mortgage‐Backed Securities (MBS) Yields and U.S. Mortgage Rates?

We conduct an empirical analysis of the Federal Reserve's large-scale asset purchases (LSAPs) on mortgage-backed securities (MBS) yields and mortgage rates. We estimate a cointergrated, error-correction model that links Federal Reserve securities purchases and stocks of Treasury and MBS securities to equilibrium MBS yields and mortgage rates. The Federal Reserve's accumulation of MBS and Treasury securities lowered MBS yields and mortgage rates by more than what would have been suggested by changes in market expectations alone, suggesting that portfolio rebalancing effects of LSAPs are an important consideration for monetary policy transmission. Our estimates also suggest that the Federal Reserve must hold a substantial market share of agency MBS or of Treasury securities to significantly lower MBS yields and in turn significantly lower mortgage rates.