Did Trump bypass the Federal Reserve to directly manipulate the mortgage market? Treasury Secretary Bessent explains the truth behind the government's new measures

The Trump administration has taken a controversial step to address soaring housing costs—bypassing the Federal Reserve and directly entering the mortgage market. U.S. Treasury Secretary Bessent revealed the core logic of this policy in a media interview on January 9. In short, the government instructed Fannie Mae and Freddie Mac to purchase mortgage-backed securities (MBS), aiming to hedge against market gaps caused by the Fed’s balance sheet reduction.

How the Fed’s “Reverse Operations” Are Choking the Mortgage Market

Currently, about $1.5 billion of MBS mature each month from the Fed’s massive $6.3 trillion balance sheet. These assets are no longer being reinvested, forming what is known as “balance sheet runoff.” Bessent pointed out that this practice actually exerts reverse pressure on the market, directly hindering further declines in mortgage rates. The new government strategy is to leverage the purchasing power of the two mortgage giants to fill the demand gap left by the Fed—this is precisely the hedging relationship between “Trump Quantitative Easing” and Fed Quantitative Tightening.

Earlier, Trump officially directed the Federal Housing Finance Agency (FHFA) to purchase $20 billion in MBS, with FHFA Director William Pulte subsequently confirming the initiation of the first $3 billion purchase. Market interpretation sees this move as an aggressive measure by the White House in the face of the housing affordability crisis, and also as a rare intrusion of the executive branch into the traditionally central bank-led financial markets.

MBS Prices Surge, Mortgage Rates Could Drop 0.25 Percentage Points

The announcement triggered a swift and intense market reaction. The government purchase policy caused MBS prices to soar, leading to rapid repricing. The risk premium of MBS relative to U.S. Treasuries decreased by about 0.18 percentage points compared to Thursday’s close. While Bessent acknowledged that these purchases would not directly cause a significant drop in mortgage rates, narrowing the spread between MBS and Treasury yields can have an indirect effect.

Analysts note that although the $20 billion purchase scale appears modest compared to the Fed’s multi-trillion-dollar quantitative easing, it is enough to exert notable pressure on the market. According to assessments by Bloomberg and several analysts, this measure could lower mortgage rates by 0.25 percentage points. The average 30-year fixed mortgage rate in the U.S. has fallen from nearly 8% in 2024 to about 6.2%, but remains well above the 3% low during the pandemic. For first-time homebuyers, this policy is especially critical—young buyers have long borne the high spread between mortgage costs and 10-year Treasury yields, as can be clearly seen through housing finance calculators (wohnungsfinanzierung rechner), which illustrate the actual impact of this gap on home purchase costs.

Blurred Boundaries of Power: Fed Independence Under Threat

Although the market welcomed the liquidity injection, opinions on the long-term impact of this policy vary, with debates intensifying around the Fed’s role. Traditionally, interest rate regulation across the broad economy has been the exclusive domain of the Fed. The Fed was designed to operate independently of political influence. Besides setting short-term borrowing costs, the central bank sometimes intervenes through large-scale purchases of Treasuries and MBS, but usually only in special circumstances—such as stabilizing distressed market liquidity or stimulating growth during severe recessions.

Baird & Co. strategist Kirill Kirelov warned investors that Trump’s directives blur the line between market practicality and political manipulation. He believes that targeted asset purchases to manipulate mortgage rates are reintroducing political risks into a market that has tried to stay clear of such practices for over a decade. Jeffrey Gorden, director of the Columbia Law School’s Center on Global Markets and Corporate Ownership, pointed out that while these purchases can be justified under the guise of “housing affordability,” they are closely linked to overall interest rate policies. The administration’s approach effectively amounts to covert monetary policy, setting a new precedent that undermines the Fed’s independence.

The Fed currently holds over $2 trillion in MBS—an inheritance from crisis-era stimulus measures. However, this scale has been decreasing for over two years at a rate of $15 billion to $17 billion per month. The Trump administration’s move is seen as a new round of overt pressure on the Fed after initial failed attempts, signaling that the White House is prepared to act unilaterally when monetary policy cannot quickly meet its objectives.

The Future of Fannie Mae and Freddie Mac Privatization Suddenly in Flux

This policy also casts new doubt on the future of Fannie Mae and Freddie Mac. The Trump team had discussed privatizing these two entities, which were taken over by the government during the 2008 financial crisis. Bessent emphasized that these purchases would not harm the financial health of the two companies and claimed they have ample cash, potentially even increasing their profits.

However, Vitaliy Liberman, portfolio manager at DoubleLine Capital, pointed out that the market initially believed that IPOs would mean the government returning these companies entirely to the public through initial public offerings. But current signals suggest otherwise—officials have realized that these two firms are important policy tools, and fully releasing them into the free market would mean losing control. JPMorgan strategists share this view, believing that the government’s desire to use GSEs as policy levers fundamentally conflicts with the expectations of private investors. The current target interest rates and the future profitability of these companies are in clear conflict, making reconciliation difficult.