0 Monetary Policy Surprises and Mortgage Rates

This paper examines the impact of U.S. monetary policy surprises on U.S. mortgage rates. 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). The results show that within the week of the FOMC announcement, both the target and path factor 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 the first week after the announcement. We also find that the target factor has a lagged impact on the 30-year mortgage rate. Furthermore, we find that the mortgage rates respond more to the monetary policy surprises especially when the surprises are large and during the period of economy expansion. 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