Repeat After Me: The Fed Doesn't Directly Hike/Cut Mortgage Rates

Some quick housekeeping before we dig into the headline: mortgage rates are slightly higher so far this week.  The increases were in place on Monday.  Tuesday started stronger, but most lenders pulled back to Monday’s levels after bonds lost ground throughout the day.  Bond prices/yields are the most important input for mortgage rates. With that in mind, we’re even more equipped to talk about the Fed announcement tomorrow.  There’s a common misconception that the Fed “sets” (or hikes/cuts) mortgage rates directly.  Even among people who know better, there is often a belief that changes in the Fed Funds Rate (the thing the Fed actually hikes/cuts) translate in some direct way to changes in mortgage rates. No… The Fed meets 8 times a year to discuss changes in monetary policy.  Apart from emergency, unscheduled meetings, these represent the 8 chances the Fed has to hike or cut the Fed Funds Rate. What is the Fed Funds Rate? The Fed Funds Rate is a target set by the Fed for interest charged by big banks to lend money to each other on an overnight basis.  It has several policy tools that ensure the target is reliably hit within a quarter of a percent margin (one reason that the Fed communicates rate targets in 0.25% windows). In other words, the Fed “decides” (for lack of a better term) what the shortest-term loans will cost.  From there, the market decides what longer term loans will cost.  Whereas the Fed Funds Rate pertains to loans that last 24 hours or less, the average mortgage lasts 3-10 years depending on the housing and mortgage environments at any given moment in history.
Source: mortgagenewsdaily.comNew feed