The Federal Reserve doesn’t set mortgage rates outright. But its decisions in setting interest rates do play a role in the percentages lenders offer would-be homeowners. And even if the Fed keeps things unchanged, mortgage rates can still fluctuate.
So, overall, how do the Fed’s monetary-policy moves affect mortgages — and influence the cost of borrowing to buy that dream home? Here’s how it all works.
What the Federal Reserve does
The U.S. Federal Reserve sets borrowing costs for shorter-term loans by changing its federal funds rate. This rate dictates how much banks pay each other in interest to borrow funds from their reserves, kept at the Fed on an overnight basis.
In 2022 and 2023, the Fed increased this key interest rate to help calm inflation — hikes that made it more costly for Americans to borrow money or take out credit.
Fixed-rate mortgages — the most popular type of home loan — don’t mirror the federal funds rate, however; they track the 10-year Treasury yield (more on that below). The fed funds rate does affect short-term loans, such as credit card rates and the rates on new home equity loans and lines of credit.
The Fed also buys and sells debt securities in the financial marketplace. This helps support the flow of credit, which tends to have an overarching impact on mortgage rates.
Fed’s latest meeting
At its meeting on September 18, the Federal Open Market Committee (FOMC) voted to decrease its benchmark interest rate by 0.50 percentage points. This move marks the first rate cut since the onset of the COVID-19 pandemic. “In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent,” the Fed said in an statement.
This rate cut comes much later than was initially expected at the start of the year. But as the economy stayed strong, and inflation remained elevated, the FMOC kept rates unchanged for eight straight meetings. The recent metrics of rising joblessness, plus cooling inflation, have caused it to act. “The Fed cuts rates by half a percentage point right out of the gate and the Summary of Economic Projections saw expectations of higher unemployment and lower inflation than was forecast just three months ago,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “This will sustain the downward momentum in mortgage rates.”
As for the months ahead, Fed Chair Jerome Powell said at a press conference that further rate change decisions will be made “meeting-by-meeting.” However, the projections released showed that many board members expect the federal funds rate to fall further, reaching a range of 3.1 percent to 3.6 percent in 2025. “The Fed’s half-point rate cut decision is the beginning of six to eight rounds of further rate cuts well into 2025,” said National Association of Realtors’ (NAR) Chief Economist Lawrence Yun in a statement. While believing “any further decline in mortgage rates will be minimal,” he did predict that “consumers who were priced out due to earlier higher mortgage rates could now be back in the market.”
Read the whole story here: https://www.bankrate.com/mortgages/federal-reserve-and-mortgage-rates/