Federal Reserve Interest Rate and Long Term Mortgage Rates
Yesterday the Federal Reserve increased their interest rate by .75% (3/4). Often this is confused with long term interest rates (fixed rate mortgages) going up by a similar amount.
The Federal Reserve increases or decreases their key funds rate when they are trying to cool off or pump up the economy. There can be a few reasons for them to act, this year the reason is inflation. They believe by increasing their funds rate to 4% by year end should reduce spending; reduced spending results in reduced demand, reduced demand results in lower prices. That’s the game plan.
Unfortunately using this tool, the Feds could easily push us into a recession. Lower demand could result in fewer jobs and less income.
When the key funds rate goes up, that does not mean long term mortgage rates go up by 3/4%. It does have an effect on long term interest rates in that they are determined by reaction to many market influences. The Feds raising rates is one of those. The immediate reaction yesterday was rates/pricing improved. This morning the market has opened up with a little more improvement.
Why would long term mortgage interest rates improve when the federal reserve rate goes up? Because long term interest rates are reactionary and the reaction to a Feds raising the rate yesterday was good in that they did what the market expected them to do. Long term mortgage interest rates are determined by what the market expects and what is delivered.
Yesterday the Feds action helped long term pricing. Today that is helped more by the fact the GDP reading came in with a negative reading.
This Friday, will be the inflation reading. Depending on if it is up or down, long term mortgage pricing will change with it.
Understanding how the Federal Reserve Interest Rate and long term mortgage interest rates interact is good. The Federal Reserve interest rate when it changes will stay there until the Feds move again. Long term mortgage interest rates fluctuate daily based on what the data of the day might be.
No one has a crystal ball to project future long term mortgage interest rates. As a loan originator I have the conversation with my clients, sharing my knowledge of how it works and what I see that may impact their pricing so they can decide when to lock in a rate. One more way they know they are getting the best service!