Home News The Fed Doesn’t Directly Hike/Cut Mortgage Rates

The Fed Doesn’t Directly Hike/Cut Mortgage Rates

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Easy housekeeping before digging into the headlines: Mortgage rates This week has been slightly higher so far. The increase took place on Monday. Tuesday started brilliantly, but most lenders returned to Monday levels after bonds were ousted throughout the day. Bond prices / yields Mortgage rates..

With that in mind, we are ready to talk about tomorrow’s Fed announcement. There is a general misunderstanding that the Fed “sets” (or hikes / cuts) Mortgage rates Directly.Even among those familiar with it, there is often the belief that changes in the Fed’s interest rates (what the Fed actually raises / reduces) will lead to changes in some direct way. Mortgage rates..


The Fed meets eight times a year to discuss changes in monetary policy. Apart from urgent unscheduled meetings, these represent eight opportunities for the Fed to raise or lower the federal funds rate.

What is the federal funds rate?

The federal funds rate is a goal set by the Fed for interest rates charged by major banks to lend money to each other overnight. There are several policy tools that ensure that the target is achieved within a quarter percent margin (one of the reasons the Fed communicates interest rate targets in the 0.25% window).

In other words, the Fed “determines” the cost of the shortest loan (because there is no better term). From there, the market determines the cost of long-term loans. The federal funds rate is related to loans within 24 hours, but the average mortgage lasts 3-10 years, depending on the housing and mortgage environment at any point in the past.

The only potential exception to the Federal Reserve setting Mortgage rates Directly, it will be a specific line of credit based on the prime rate (this will change with the Fed’s rate hikes / cuts). This is a very minority in the mortgage market and has nothing to do with the dominant 30-year fixed loan.

So why are interest rates so responsive to the Fed’s announcement?

Fed may not be configured Mortgage rates Directly, but they can still say / do something that has a huge impact on every method Interest level.. One of the most notable examples is QE or quantitative easing. This was the Fed’s policy of buying large quantities of Treasury and mortgage-backed securities to drive the Fed’s policy goals. QE policy changes have a far greater impact on long-term interest rates than short-term federal funds rates, especially when unexpected.

I think you said that the federal funds rate wasn’t a problem, but I hinted that it had an impact. What can i do?

Yes, the federal funds rate has an absolute impact on long-term interest rates such as mortgages. And yes, the Fed will definitely raise / lower the federal funds rate. But catch has something to do with timing.

Recall that the Fed meets only eight times a year, but the market trades every millisecond. Traders aren’t waiting for the Fed to trigger a rate hike. In fact, there is an entire group of market securities dedicated to betting on future federal funds rates (named “Federal Funds Futures” by the way).

These futures are typically priced at almost 100% accuracy with most future Fed rate hikes / cuts. This is not always the case, but it is becoming more and more common in this era of highly transparent speeches from Fed members. For example, if seven out of seven Fed speakers last month said they were leaning towards raising the federal funds rate by 0.75, that’s essentially guaranteed and the bond market has changed over time accordingly. I am.

It’s not uncommon to see the market so far it can appear in the party prior to the Fed itself Mortgage rates It moves in the opposite direction of the Fed on the day it actually starts moving.

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