U.S. Monetary Policy Surprises and Mortgage Rates

Abstract

This paper examines the magnitude and persistence of the mortgage rate pass-through in response to U.S. monetary policy surprises. The policy surprises are measured by both the surprise changes to the target federal funds rate (the target factor) and surprises in the future direction of the Federal Reserve monetary policy (the path factor). We find that within the week of the FOMC announcements, both the target and path factors have significantly positive impacts on the 1-year ARM rates. In addition, the impact of the target factor on the 1-year ARM rates lasts up to one week after the announcement. We also find that the target factor has a one-week lagged impact on the 30-year fixed mortgage rate. Thus, short-term adjustable mortgage rates experience higher degree of pass-through and faster adjustment speed than long-term fixed mortgage rates. Furthermore, there exist the asymmetric adjustments of U.S. mortgage rates, and the pass through of mortgage rates in responses to monetary policy surprises are affected by the size of monetary policy surprises, the direction of business cycle and whether monetary policy is tightening or loosening. We also find that there exists heterogeneity in the mortgage rate pass-through process across regions. The cross-region variation in the response to the target factor is correlated with growth in income and the unemployment rate in the region, while the cross-region variation in the response to the path factor is mainly related to the housing market factors, such as the rental vacancy rate.