Before today’s meeting for the Federal Reserve, otherwise known as the FED, there was a discussion about whether they would raise the Fed Funds Rate or not, with the majority expecting a 0.25% increase. The Fed did end up raising rates by 0.25%, but despite this, the market had been anticipating rate cuts of approximately 0.75% by the end of the year. And the Fed’s latest projections indicate that there will be no rate cuts by year-end and, in fact, rates may even be slightly higher by 2024.
Both Treasury yields and mortgage rates, which are closely linked, fell significantly after the announcement.
But how could this happen? Doesn’t it mean mortgage interest rates go up when the FED raises rates?
Short answer: No.
The FED Rate and Mortgage Rates Aren’t Directly Correlated
First, it’s important to understand that the Fed Funds Rate is not directly tied to mortgage rates. Mortgage rates are determined by a variety of factors, including economic conditions, inflation, and supply and demand in the housing market. While the Fed’s rate hike may have some impact on the broader economy, it doesn’t necessarily translate to immediate changes in mortgage rates.
Tighter Lending Coming Forth?
However, there’s another important factor at play here. In the FED chairman’s comments following the announcement, he discussed the tightening of lending conditions due to the recent banking issues. This may sound like a small matter, but it actually carries a lot of weight in shaping economic momentum.
Lending and credit are crucial to economic growth and inflation. When lending slows down, or there are stricter requirements to qualify for loans, it puts downward pressure on inflation. And inflation has been a key driver of high mortgage rates in recent months. (High inflation is the base reason the FED has continued to raise rates consistently for some time now)
Shift in Policy?
So, in spite of the Fed’s rate hike and unchanged outlook for 2024, the market saw some indication of a policy shift in Powell’s comments – a potential shift in the big picture cycle of economic growth and inflation. It’s also possible that the FED chairman’s warning on banks caused investors to fear additional banking issues in the days and weeks ahead, leading them to sell off assets in favor of safer options like bonds, which in turn caused a drop in mortgage rates. (Higher demand in bonds cause their prices to go up, and their yields to go down)
Mortgage Rates are Down
The result of all this is a positive development for the average home buyer, with 30-year fixed rates falling by almost a quarter point for most lenders. However, it remains to be seen whether this is temporary or a sign of more long-term changes to come. Ultimately, it will depend on other economic data that continues to come out and whether we see any more banking drama in the near future.
Final Thought
So, what can we learn from this? It’s important to keep in mind that the Fed’s actions don’t always have a direct impact on mortgage rates. So next time you hear someone saying how mortgage rates because the FED raised rates, you’ll know they’re silly and don’t know what they’re talking about. Instead, there are a variety of factors that can influence mortgage rates, including the 10 year treasury, economic conditions, inflation, and lending conditions. By keeping an eye on these different factors, we can better understand the broader trends in the housing market and make informed decisions about when the right time is to buy or refinance a home.