The Mortgage Rates Move Whenever The Federal Reserve Meets 

Will the Fed be lowering the interest rates? They don’t have control over mortgage rates, but they do have some influence over the mortgage rates, especially during the Covid-19 pandemic. They have purchased billions (worth) of consumer mortgages over the last year. This has helped to keep the interest rates low during this time. The Fed also had a policy in place that included low-interest rates and combined with this it assisted with keeping the rates close to record lows during 2020 and even the early parts of 2021. 

Since then the rates are now going up and most believe the Fed won’t be doing anything to put a stop to this. For borrowers, this isn’t great news, but these rates are expected to increase as the economy improves. When Covid-19 is not a large issue anymore, the Fed will roll back most of the interventions as everything returns to normal. 

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What Actually Happens During Federal Reserve Meetings?

Every 6 weeks the Federal Open Market Committee (FOMC) meets where they talk about the policy involving interest rates. This is a sub-committee within the Federal Reserve made up of 12 people that rotates. Jerome Powell, the Federal Reserve Chairman is the head of this committee. 

The committee works off a pre-determined schedule where they meet up 8 times a year. They also hold emergency meetings when problems arise, such as the financial crisis that occurred between 2008 to 2011, when the economy in the U.S. was trying to fight off depression. It also occurred in 2013, when the debt limit was not increased by the government. 

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The FOMC is best known for the role it plays in maintaining federal fund rates. But how will the federal fund rates affect you?

In most cases, The Federal Reserve does not have control over mortgage rates. Most people are under the assumption that the Federal Reserve is solely responsible for mortgage rates, yet this actually isn’t the case. It is Wall Street that actually sets the mortgage rates. 

Over the last 2 decades, the federal funds rate and an average 30-year fixed mortgage rate have shown differences by as small as 0,5% and by more than 5%. 

If the federal funds rate were in control of mortgage rates, differences that occur between the 2 would be linear or logarithmic and not jagged. 

The Fed does have a certain level of influence on today’s mortgage rates. After each meeting, the FOMC will usually issue a press release that highlights the opinions and economic consensus of the group. 

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Mortgage rates tend to increase if the sub-committee has published a press release that is typically “positive” when it comes to the economy. When a press release has an outlook that is negative, mortgage rates usually go down. 

In the last year, any news relating to economics has been mainly negative due to the pandemic. This has resulted in the interest rates, which have also included the mortgage rates, staying close to record lows. 

With a lot of the population now vaccinated and signs that the economy is beginning to rebound, these trends are about to reverse, which means mortgage rates are going to rise. 

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In What Way Has The Federal Reserve Influenced Mortgage Rates?

The main influence that the Federal Reserve has had on mortgage rates has been indirect. 

However, the Fed Reserve does have a few options if they plan to influence mortgage rates directly. 

There is something called QE, which stands for quantitative easing. 

This occurs when the Fed injects cash flow into the economy to make sure the rates remain at lower levels. This is what prompts consumers into borrowing more money which helps to keep cash circulating. 

This is what the Federal Reserve did during the earlier stages of the covid-19 pandemic. They purchased consumers mortgages in the billions in a secondary market that started in March 2020. 

When this secondary market has an increase in capital, it helps to keep mortgage rates lower for borrowers. This is the reason why over the first 9 months of the pandemic the mortgage rates decreased and stayed at this record-low level over that time. 

When mortgage experts state that they do not control mortgage rates, they are actually still right, since mortgage rates are not decided by the Fed Funds rate. 

Today this statement is usually accompanied by a large asterisk since many people have started to notice the influence the Federal Reserve often has over interest rates. 

What Does It Mean When Interest Rates Are Cut By The Federal Reserve?

The Federal Funds Rate is a rate that banks use when they lend money to each other. This occurs on an “overnight basis”. 

When the Federal Reserve has set the Fed Funds rate low, this typically means they are in the process of attempting to encourage growth. This usually stimulates economic growth since the Fed Funds rate correlates to the Prime Rate. This is a basis that most lenders will use in relation to business loans and consumer credit cards. 

The Fed Reserve will manipulate the Fed Funds rate when they manage their dual charter of encouraging maximum employment and retaining stable prices. 

This option can be tricky since when the Fed Funds Rate happens to be low, this can result in wage pressure and risk-taking, which can both result in inflation relatively quickly. Inflation is when the prices start to go up. 

This is the primary reason why the Federal Reserve made the decision to put an end to the Zero-Interest-Rate policy in December 2015, which resulted in a 25 basis points (0.25%) increase rate (for the first time in more than a decade). 

When the Federal Reserve did this, it did not increase mortgage rates. In fact, the mortgage rates actually dropped 50 base points (0.50%) after the Fed Reserve ended this policy in late 2015. 

This occurred because the Federal Reserve does not set or establish the mortgage rates, nor does any of its members. Mortgage rates are typically determined by Mortgage-backed securities (MBS) which is something that gets sold on Wall Street. 

The Fed does not have the power to set today’s mortgage rates, but it will and can affect them. 

How Does Statements From The Fed Affect Mortgage Rates?

The work that the Federal Reserve does involves more than only setting the Federal Funds rate. They also hold the responsibility of providing the markets with economic guidance. 

If you are one of the rate shoppers, you should be listening to what the Federal Reserve says about inflation. Inflation happens to be the largest threat to mortgage bonds. Mortgage rates typically increase when inflation pressure starts to increase. 

There are direct links between inflation rates and mortgage rates. This is exactly what most homeowners experienced in the 1980s. 

The inflation was really high and this led to the highest rates for mortgages ever. Both the 30-year and 15-year rates went extremely high and many people will never forget that. The 30-year mortgage rate increased to more than 17%. 

The Federal Reserve does not control or set mortgage rates, yet there are direct links between inflation and mortgage rates. Inflation is the term used for describing the loss of purchasing power. When economies experience inflation, consumers are going to need a higher amount of their currency to purchase the same goods. 

Inflation is even experienced in grocery stores. A milk gallon that once cost $2 now costs $3. Consumers are forced into spending more money in order to buy the same gallon of milk since the dollar has now lost a portion of its overall value. 

MBS (mortgage-backed securities) prices determine the mortgage rates. The MBS are denominated in US dollars. Once the US dollar becomes devalued, the U.S. MBS is also going to experience devaluation. 

When economies experience inflation, the mortgage value will decrease which results in an increase in mortgage rates. 

This is the reason why Wall Street watches the Federal Reserve’s comments closely when it comes to inflation. When the Federal Reserve has an increase in inflammatory pressure on an economy, it raises the chance of mortgage rates increasing. 

Federal Reserve FAQs

What Is The Federal Reserve?

The Federal Reserve is the Central Bank in the U.S. It is an independent organization, that is not under the control of the government. The work that the Fed does involves managing the monetary and currency policy of the United States and contributing toward making sure the economy remains stable. In simple terms, they have the power to influence things like interest rates that are paid on credit cards and business loans. They also have a large influence over the prices that consumers are paying for daily goods since this manages inflation. 

What Does The Fed Do?

The role of the Federal Reserve involves keeping economic growth as stable as possible in the US. This is done by managing the currency in the U.S., setting the lending rates, as well as managing inflation with the use of several monetary policies. The Fed typically works on keeping inflation and interest low enough to ensure businesses and consumers continue spending, yet still high enough so that it stops the stagnation in the economy. 

When Was The Federal Reserve Created?

The Fed was first created in 1912 when the Federal Reserve Act was signed. The primary reason why the Fed was created was to provide America with a safer, more flexible, and more stable monetary and financial system. These statements are according to the FED. In other words, the FED’s work involves influencing banks and monetary policy to ensure the economy does not grow or shrink too quickly. The aim is to make sure prices remain stable which allows consumers to spend and borrow, and for businesses to remain afloat and provide steady employment. 

Why Does The FED Raise Interest Rates?

The FED periodically increases interest rates. The Federal Reserve increases the Federal Funds Rate, since this influences things such as interest rates on credit cards, and home equity loans, as well as indirectly on other things like fixed-rate home loans. Why does the Federal Reserve raise the rates, to begin with? 

They do it because it assists in managing inflation. When interest rates are low, this results in more borrowing which can result in overheating the economy. The prices will then increase since the demand for certain goods also goes up. They can then manage inflation by increasing the rates, which slows down consumption. They also fight off deflation by decreasing the rates. When “cheap money” is available, the demand for goods increases, and so does the spending. This increases prices in the U.S. economy. 

What Are The FED Funds Rate?

The FED Funds Rate or the Federal Funds Rate is an interest rate that the banks charge one another when borrowing overnight. 

Why Is It Important To Take Notice About The Rates The Banks Charge Each Other? 

This is the rate that will impact consumer borrowing. Add 3% to the Federal Funds rate and you arrive at the Prime Rate, which is a basis that is used when deciding the rate for consumer credit lines such as auto loans, home equity loans, and credit cards. Not every rate is locked into the Fed Funds rate. The mortgage rates are one of the examples, yet the Fed Funds rate still has an influence over it. 

Who Controls The Federal Reserve?

The Federal Reserve isn’t controlled by the government or any of its branches. It is entirely independent and includes 12 Federal Reserve Banks and a Board of Governors. The FOMC includes 7 board members along with a cast of rotating Federal Reserve Bank presidents. The Federal Reserve Open Market Committee (FOMC) is one of the governing bodies of the Federal Reserve. This committee meets every 8 weeks where they review and discuss interest rate policies.