09/19/2024
I know I know, ‘Nick we only want to hear about good rate stuff’, well it’s coming, but i also wanted to try and explain to folks who aren’t in the business why we didn’t see mortgage rates fall by .5% when the Fed cut their funds rate by .5%. Hope this helps someone who’s feeling lost in all this. Trust me, you’re not alone.
Think of the Federal Reserve’s interest rate (Fed funds rate) like the speed limit on a highway. Just because the speed limit changes doesn’t mean every car (or in this case, mortgage) will go faster or slower at the same time. The Fed funds rate is mainly what banks charge each other to borrow money overnight. Mortgage rates are like the speeds individual cars are driving on the highway—they can be influenced by the speed limit (Fed funds rate), but they also depend on other factors, like how many cars (borrowers) are on the road or how busy the traffic is (inflation, the economy, etc.).
Now, let’s break it down even more:
1. Fed funds rate vs. mortgage rates: When the Fed cuts its rate, it can influence mortgage rates, but it doesn’t directly control them. This is because mortgage rates are more affected by longer-term factors, like bond yields, inflation expectations, and overall economic conditions.
2. Correlation over time: Historically, when the Fed cuts its rates, mortgage rates often decrease too—but not always at the same time or by the same amount. Mortgage rates are typically more aligned with 10-year Treasury bond yields than the Fed funds rate, and those yields can be affected by market conditions like investor confidence, inflation, and economic outlook.
3. Moving forward: If the Fed cuts rates, it’s usually because they’re trying to help the economy by making borrowing cheaper. Over time, this can cause mortgage rates to go down if the economy slows or inflation decreases. However, if investors are worried about inflation or other risks, mortgage rates might not fall as quickly or as much as the Fed’s rates.
In short, the Fed’s rate cuts don’t immediately change mortgage rates, but they can influence the overall trend. Buyers should keep an eye on market factors like inflation and bond yields to get a better sense of where mortgage rates might be headed.
