How Does the Fed Affect Mortgage Rates?

     What does the Fed do to mortgage rates?  In the words of the late Edwin Starr, "Absolutely Nothin'".  Yesterday. Janet Yellen announced a .25 increase in the Fed funds rate, and those in the real estate industry seemed quick to scare the pants off of potential home buyers by telling them the Fed is eating into their buying power.

The reality is, the Fed's rate moves have little to no actual or immediate impact on the mortgage market.  Like so many other areas of the global economy and geopolitical environment (commodity trading, natural disasters, wars, Brexits, Grexits, and jobs reports), there is a residual and indirect impact, but that's the case with just about everything these days.  What the Fed funds rate does impact is the amount of interest charged to banks borrowing from the Fed & each other.  For this reason, the Fed move has a direct impact on the prime rate (tied to credit cards, lines of credit, and other variable rate debt instruments), so a Fed move will affect things there, but the impact is nowhere even close to the impact that would be felt if that could unilaterally increase mortgage rates by .25 with the wave of a wand.

     To illustrate this further, let's look at what happened when the Fed made their announcement.  Mortgage bonds improved more than they have in months (on a single day basis), and mortgage rates actually dropped by nearly .25.  So while fear mongering agents and ignorant mortgage "professionals" are telling people how much their buying power will be hurt, buying power actually improved immediately.  

     The problem with selling fear is that for every person that buys into it, there's another who sees right through you, and thinks you either ignorant, or worse, a crook.  So if you're spouting off these warnings with false information, which are you?  

     The reality of the marketplace is rates are heading up and it doesn't look like that trend is stopping any time soon.  So go ahead and spread the word, discuss decreases in buying power, and why it's important to buy now (if you think it is).  But don't blame the Fed.  Blame inflation.  Blame a roaring economy and jobs numbers that haven't looked so good since the 70's.  Blame it on a rolling back of regulations and a more business-friendly administration.  Blame it on something that, in reality, is having a direct effect on the rates.  But don't go fear mongering over the Fed, because in doing so, you're wrong.  Your information is wrong, and spreading it around for personal benefit makes you either ignorant, or a crook. 

POSTED BY

John Meussner