Fed Funds Rates & Mortgage Rates are NOT the Same!
Here is the interest-rate scoop: the Federal Reserve will be increasing its “target rate/primary credit rate” above the current 0-0.25%, which has been in place since the hit of COVID. Forecasts for how high they will hike this rate over the next year are in the range of approximately 2.0 (so 1.75% higher than current rates). This does NOT mean they are increasing mortgage rates (more below). Instead, the rates they have control over are the rates at which commercial banks borrow and lend their excess reserves to each other overnight. An increase in the fed funds rate means banks will start to increase borrowing rates on consumer loans and business loans. These are loans like variable Home Equity Lines of Credit (HELOCs), auto loans, credit cards, business loans, etc. — but not mortgage loans.
Mortgage rates are actually driven by the bond markets, and more specifically, mortgage-backed securities (MBS), NOT the fed funds rate. MBS markets do move/react to the actions the Fed takes, as its changes impact the sentiment of the overall markets. However, in the current situation, the Fed is hiking rates to help curb and decrease inflation. If they are successful, this can actually LOWER mortgage rates in the future, because the MBS market does not like inflation. That means lower inflation will create more demand for the MBS market (among other bond markets). When demand is high, prices rise and yields (aka: rates) fall! Historically speaking, when the Fed increases rates to curb inflation, mortgage rates have dropped dramatically in the months following these actions.
However, if they are unsuccessful in curbing inflation and are forced to take more action, they could begin selling off their MBS holdings (which they have acquired heavily over the past several years as part of their quantitative easing policy). If the Fed sells these holding, then rates could increase—just the opposite of the earlier point: if less investing happens in the MBS/bond market, prices drop and yields (aka rates) increase.
Fingers crossed that raising federal funds rates curbs inflation, and we all enjoy lower mortgage rates!
As always, The Lassig Team at CrossCountry Mortgage is here to answer any questions you may have.
Call or text us at 801.713.4000.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. CrossCountry Mortgage, LLC (“CrossCountry”) does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by CrossCountry.