The FED Doesn’t Set Mortgage Rates. Repeat - The FED Does Not Set Mortgage Rates.

Probably the most mis-used (or understood) statement thrown out by “experts” in all of real estate.  “Buy a home before the Fed raises rates.”  “The Fed lowered rates today, great time to refinance or buy.” 


The truth is that the Federal Reserve does actually NOT set or control interest rates.  Their meetings and decision can certainly have influence over what direction mortgage rates may or may not move in, but they do not control them outright, as most tend to assume.   What they actually do control is the Fed Funds Rate, and this is the rate at which banks lend money to one another on an overnight basis.  It helps kick the money supply into action and ultimately promote economic growth, because this Fed Funds Rate is correlated to another rate many have heard of or reference - the Prime Rate, and this rate is the basis of most all bank lending for items like business loans, auto loans and credit cards.  


Historically, there has been little tracking, if any, between mortgage rates and the Fed Funds rate.  There have been many meetings in the past where the Fed decided to raise rates and mortgage rates ultimately went the other way that same market day.  Or vice versa.


Mortgage rates are determined by the price of mortgage backed securities, which are sold on Wall Street. They also loosely follow the the US 10 year Treasury Yield, which is where there can be some confusion when it comes to the overall markets. Specifically, we can look at this recent development with China and the Fed’s decision to lower rates by 25 basis points. 


China and the US have been engaged in a back-and-forth about currency manipulation and tariffs (or taxes and imports/exports) as of late.  Unless you have been living under a rock, this is everywhere in the news cycle!  The fear and looming threat of a long term trade war is creating feeling that the US economy may slow down as a result.  To combat this, the Fed lowered rates here to stimulate the continued flow of money within our system here at home.  That fear also caused the stock market to go a little sideways (sell off, take a a dive) and typically when this happens, that money which is pulled out of the stock market then flows into safe havens for security, or US Bonds.  This, ultimately, cases yields to lower (or in the case of this week - CRASH) and that impacts mortgage rates BECAUSE - US 10 year treasury yields loosely trend with mortgage rates.  So this is where the Fed can have a slight impact on mortgage rates, if you wanted to seek a connection (since they make decisions that affect Wall Street and those decisions can impact the bond market which can then have impact on mortgage rates). 


So now you know how mortgage rates move and also what is actually happening when the Fed decides to lower or raise rates!  


What does this mean for us here in the Bay Area?  Lower mortgage rates will continue to create affordable payment options for those looking to get into the market and purchase a home, as well as create opportunities for those who already own to either lower their rates/payments, or access equity to put to work for them elsewhere in the broader market (another real estate acquisition, paying down debt, home improvements).  


If you are curious about where rates stand in relation to your current home loan or if there could finally be an opportunity for you to enter the market with more affordable programs/rates, feel free to reach out!

Email me for more information.

Arjun Dhingra