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No, The Fed Hike Doesn’t Mean Anything For Mortgage Rates

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Below is a copy and paste from a previous article that inevitably repeats itself on Federal Reserve Day. Nothing new here if you’ve seen it before. If not, or if you expect an equivalent change soon, mortgage interest rate Read on when the Federal Reserve announces rate hikes today! They can and almost certainly will. The point is that Fed rate hikes themselves are not functionally related to mortgage rates (except for the rare case of certain lines of credit based on PRIME rates that are actually linked to Fed Funds rates).

There is a common misconception that the Federal Reserve directly “sets” (or raises/lowers) mortgage rates. Even those in the know often believe that changes in Fed rates (what the Fed actually raises/lowers) lead to changes in mortgage rates in some direct way.

No…

What is the Federal Reserve Funds Rate?

The Fed Funds Rate is the target set by the Fed for the interest that large banks charge for lending money to each other on an overnight basis. There are some policy tools to ensure that we hit our target within a quarter of the margin (one reason the Fed announces its interest rate target in a window of 0.25%).

In other words, the Federal Reserve (Fed) “fixes” the cost of the shortest term loan (because there is no better term). From there, the market determines the cost of long-term loans. The Fed Funds Rate relates to loans within 24 hours, but the average mortgage lasts him 3-10 years depending on the home and mortgage environment at any given point in history.

The only potential exception to the Fed directly setting mortgage rates is certain lines of credit based on PRIME rates (which change as the Fed raises/lowers rates). This is a small part of the mortgage market and has nothing to do with the dominant 30 year fixed loan.

So why do interest rates sometimes react so strongly to Fed announcements?

The Fed may not be able to directly set mortgage rates, but it can still say and do things that have a huge impact on all kinds of economies. degree of interestOne of the most notable examples is quantitative easing or quantitative easing. This was/is the policy of the Fed to buy large amounts of Treasuries and mortgage-backed securities to further policy goals. Changes in QE policy, especially if they are unexpected, will have a far greater impact on long-term interest rates than on short-term Fed Funds rates.

I think you said the Fed Funds Rate wasn’t an issue, but you were only hinting that it had an impact. what to give

Yes, the Fed rate absolutely affects long-term interest rates such as mortgages. Yes, the Fed will definitely raise/lower the Fed Funds Rate. But the catch has to do with timing.

The Fed meets eight times a year to discuss changes in monetary policy. Aside from urgent unscheduled meetings, these represent eight chances the Fed should raise or lower the Fed Funds Rate. This is in contrast to the bond market (which actually determines mortgage interest rates), which trades every millisecond.

Traders aren’t going to wait for the Fed to actually trigger a rate hike. are included).

These futures typically price most upcoming Fed rate hikes/cuts with near 100% accuracy. This isn’t always the case, but it’s becoming more and more common in this day and age of extremely transparent speeches by Fed members. For example, if in the past month he said that 7 out of 7 of his Fed speakers were all leaning toward his 0.75 hike in Fed rates, it is essentially guaranteed, The bond market has long changed accordingly.

Markets can appear to party long before the Fed itself, so it’s not uncommon for mortgage rates to move in the opposite direction of the Fed on days when the Fed actually moves.

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