Federal Reserve Sets Federal Funds Rate
The Federal Reserve is the central bank in the United States. It manages the supply of money and the cost of credit. Its stated goal is a prosperous economy via its dual mandate of price stability and maximum employment.Does the Fed Set Mortgage Rates?
Although the Fed fund rate doesn’t set mortgage rates, it does directly affect what consumers pay to borrow money. It has, therefore, some influence. There are other economic factors that affect mortgage rates.Other Factors
The economy is a major factor in determining mortgage rates. Some of these include the jobs market and supply and demand. Personal factors can also influence a mortgage rate.Inflation
Mortgage rates and inflation usually correspond with each other. When inflation is high, rates are high. Inflation often leads to consumers buying less. This means that lenders must make up the loss by charging higher rates.Favorable Job Market
The job market also influences mortgage rates. When it is favorable and inflation holds to at least 2 percent, which is the Fed’s preferred target rate, the Fed doesn’t have an incentive to cut the fund rate.Personal Circumstances
The borrowers’ circumstances will also affect the mortgage rate. There is a bottom rate that can only be achieved, but reaching it has a lot to do with the individual, including:- Credit score
- Borrowed amount
- Employment
- Debt
Mortgage Rates and Fed Rates Not in Sync
The federal funds rate sets the tone for the economy, but the credit market often reacts before the Fed does. The federal funds rate influences mortgages, but doesn’t control them.When rates rise, credit becomes more expensive. This compels demand to die down—which implies that the Fed reduces demand for mortgages. That’s because fewer consumers can afford to borrow.
This forces lenders to compete more for the few borrowers left in the market. As a result, mortgages and the federal fund rate don’t sync. Lenders will lower or raise their rate before or after a change in the federal fund rate.
Bond Investors and Fixed Mortgage Rates
Bonds are long-term investments. Corporations issue bonds, but the most well-known are Treasury bonds issued by the federal government.Just like most mortgage loans, a bond has a fixed interest.
There’s a ripple effect between bond rates and mortgage rates. That’s because mortgage lenders set their rates slightly above bond yields to attract risk-averse real estate investors. With a mortgage, there’s a safeguard of property collateral.
The result is when bond rates increase due to dropping prices, mortgage rates usually grow to match the trend.
Yet conversely, strong bond markets with high prices and low yields lead to reduced mortgage rates.
Adjustable-Rate Mortgages and HELOCs
The federal funds rate cut closely influences adjustable-rate mortgages and HELOCs. An adjustable mortgage rate changes about every six months. So, when there is a rate cut, the monthly payment decreases. But when rates increase, so does the monthly payment.Federal Funds Rate Cut and Other Financial Products
Credit card interest rates are slightly affected by a Fed rate cut.Savers, who have enjoyed higher rates for certificate of deposit (CD) and savings accounts, were impacted by the Fed rate cut. In anticipation of the rate cut, more than half of traditional banks reportedly cut their CD rates, and one-third cut their savings account rates.
More Rate Cuts Ahead
In the September meeting, the policy-making Federal Open Market Committee (FOMC) published a forecast as to what is coming next: two more rate cuts of 25 basis points.The majority predicted there will be more cuts, but others predicted no further action. If inflation eases, the additional cuts may not happen.
