The Federal Reserve announced today that it will reduce the pace of its monthly asset purchases from $65 billion to $55 billion, continuing its withdrawal from the extraordinarily accommodating monetary policy of recent years that was first outlined at its December 2013 meeting. Half of the reduction ($5 billion) will come from the Fed’s monthly purchases of U.S. government debt, which will fall to $30 billion, and half will come from the Fed’s monthly purchases of Agency debt and mortgage-backed securities (MBSs), which will fall to $25 billion. (By convention, “Agency” refers to the three corporations that own or insure the large majority of U.S. home loans—Freddie Mac, Fannie Mae, and Ginnie Mae.)

In addition, the Fed revised its guidance as to the likely path of the Federal Funds Rate moving forward, removing a reference to a 6.5 percent unemployment rate as a threshold signaling when interest rates might rise from their current 0%-0.25% range. According to Fed Chair Janet Yellen, the unemployment rate threshold was dropped, in part, because the FOMC believes that faster-than-expected progress toward a labor market recovery may overshadow slower-than-expected progress toward raising inflation to its long-run objective of 2 percent.  While Federal Reserve officials have repeatedly underlined the conditional and tentative nature of these guidelines, financial markets have tended to carefully parse changes to these quantitative and qualitative guidelines for signals about how markets might evolve.

The most obvious and direct consequence of Fed policy for homebuyers is how monetary policy influences interest rates. With the Federal Funds Rate—the interest rate traditionally used by monetary policy makers to shape market interest rates—near zero since December 2008, the Fed has turned to a range of unconventional tools to influence market interest rates, most prominently through Large-Scale Asset Purchases (LSAPs). The channels through which Fed purchases of Agency debt and MBSs influence mortgages rates are widely debated, but many observers emphasize how Fed demand for these assets shapes the risks that other market participants are willing to assume, and particularly the types of loans that banks and investors are willing to make.

Recent research by Diana Hancock and Wayne Passmore at the Federal Reserve Board suggests that Fed purchases of MBSs on the scale of $10 billion per week—nearly double the pace announced today—reduce mortgage rates by 11 basis points per week.[1] If their finding can be extrapolated to the current pace of MBS purchases, this would suggest that the $25 billion in MBS purchases announced today can be expected to continue putting downward pressure on mortgage rates on the scale of about 28 basis points over the next four weeks. Of course, many idiosyncratic factors beyond Fed policy influence mortgage rates.  However, it is important to emphasize that even though the pace of asset purchases has slowed, the Fed’s portfolio is continuing to expand and monetary policy is still putting downward pressure on the full spectrum of interest rates, including mortgage rates.

For consumers, and particularly for homebuyers or potential homebuyers considering entering the market, this point is frequently lost in the frenzy of media coverage and market speculation that surrounds Fed meetings. Interest rates remain extraordinarily low and will most likely remain extraordinarily low for a long time. And in the end, the decision about whether to buy or refinance a home now rarely depends on interest rates alone. It’s probably not a good idea to make such an important decision such as home buying based on what the Fed might or might not do.