05/04/2022
The Fed Increased the Fed Funds Rate today as expected by 50 basis points. They are expecting 2 more increases in the coming months at 50 basis points each.
One of the most frustrating things for me in my profession is what I consider to be the very poor job the media does in educating the consumer on what Federal Reserve actions actually do to mortgage rates. Typically when the Fed lowers or raises the overnight funds rate, people call thinking that there is a direct correlation with mortgage rates. I will tell you that more often than not the opposite has occurred.
First of all the Federal Reserve has no direct impact on mortgage interest rates. The Federal Reserve controls the short term overnight lending rate, the fed funds rate and the discount rate, which have a very close relationship to the prime rate which effect short term lending.
When the Fed lowers the rates, the stock market rallies, mortgage backed securities sell off and mortgage rates go up. The inverse also typically happens when they raise the interest rates. Contrary to popular belief, mortgage rates typically improve when this occurs. Remember a few years ago when it was announced that the Feds lowered rates to zero and everyone was calling to get that 0% refi rate? Rates never went to zero.
What has made rates go up has been inflationary pressure and global issues. When the fed steps in to raise rates, they do so to fight off inflation. Inflation erodes mortgage bonds and causes rates to rise. If the Fed is successful at putting a lid on inflation by raising the overnight rate, mortgage rates typically tend to improve. History and past data also tells us that any time we have entered into a recession, mortgage rates improve.
If you have questions, please reach out.
