File this one under “no need to panic,” despite constant warnings of a Fed move impacting mortgage rates.
You can’t blame them (the media) – it makes for a good headline, but much of what is thrown out there usually isn’t true or anything to worry about.
In most cases, it’s fear mongering, or simply something to fill the page. It tends to be a regurgitated article that comes out around the time the Fed meets, which is every six weeks throughout the year (eight times annually).
Whenever a Fed announcement comes along, you’ll start to see an uptick in articles about what mortgage rates will do when the Fed speaks, with the most common one being “rates expected to rise” or something of that nature.
Or you’ll get straight up definitive articles warning you about the impending rate rise and what you should/can do to mitigate the damage. The problem is it’s simply not accurate and these things tend to do more harm than good.
The Fed Doesn’t Announce Mortgage Rates
When the Fed gets together to set the target rate for the Federal Funds Rate, financial markets (stocks, bonds, etc.) pay attention and react. As does the media because it’s generally a big deal. But Janet Yellen and co. don’t sit down and decide which way mortgage rates will go.
Rather, they discuss the state of the broader economy, inflation, monetary policy, and so on. They almost never mention mortgages explicitly, except for at the moment thanks to the remnants of the quantitative easing program known as QE3.
Additionally, there’s no clear correlation between the Federal Funds Rate and mortgages. In other words, one can go up while the other goes down. Or one can do nothing while the other does something. Or they can move in the same direction for a while.
But the spread between the two won’t remain in a certain range over time like mortgage rates and the 10-year bond yield do. You can’t say the 30-year fixed should be X% higher or lower than the Fed Funds Rate at any given time.
As you can see from the St. Louis Fed chart above, the 10-year yield and the 30-year fixed (based on Freddie Mac data) move in relative lockstep. You can see the blue line and red line move in a very similar fashion over the years with a pretty steady spread. Then there’s the green line (Fed Funds Rate), which is all over the place.
Sometimes you see a long-term trend, but other times you see no apparent correlation.
Check out the second graph, from 2000-2010, which shows some similar movement between the FFF and mortgage rates, but at times no obvious relationship.
In short, mortgage rates don’t necessarily follow the Fed, whether that’s up, down, or nowhere at all.
The Fed Indirectly Influences Mortgage Rates
Some may argue that the Fed indirectly influences mortgage rates. Really, the Fed is just trying to control inflation via short-term rates. This in turn dictates how longer-term rates may play out.
Essentially, the market for longer-term rates such as 30-year mortgages (and mortgage-backed securities) might seek direction from Fed moves.
The Fed tends to telegraph its moves well in advance, so it’s pretty rare for anyone to get too surprised the day they release their FOMC statement.
However, they do give an indication as to which way we’re (the economy is) headed and what kind of monetary policy is in store, which can be important to longer-term rates, such as 30-year fixed mortgages.
That means the Fed statement can have an immediate impact on mortgage rates on the day it’s released, to the point where lenders may need to reprice ratesheets from morning to afternoon.
But, that reprice can completely counter the Fed’s move. For example, yesterday the Fed raised its key rate 0.25%, whereas mortgage lenders repriced to the better (lower).
Rates Can Go Either Way…
So, Fed announcements can affect mortgage rates, but how they’ll affect mortgage rates is mostly a crapshoot. You can’t say oh, the Fed lowered rates so my 30-year mortgage will be lower too. And you can’t say oh no, the Fed raised rates, I should have locked my mortgage!
In fact, those who listened to their smart loan officer and let their rate float through the announcement may have been rewarded with a 0.125% pricing improvement. Instead of 4.5% on a 30-year fixed, their new rate might be 4.375%.
Of course, it doesn’t always go so well. As alluded to, it can be a mystery as to how things will go post meeting, and you can always get hung out to dry. That’s why floating a mortgage rate isn’t for the faint of heart.
But again, the Fed’s move may have no bearing on your mortgage rate, at least not today, or even tomorrow. They might just be good at telling us which direction mortgage rates are headed (eventually) based on policy and broader economic conditions.
If you’re wondering why mortgage rates fell after the announcement yesterday, perhaps it was simply a “relief” to hear that everything was as expected. That is, there’s still economic uncertainty.
You could argue that mortgage lenders defensively raised rates prior to the announcement to avoid getting caught out, thereby putting some homeowners in unnecessarily high rates recently.
Did you notice their ascent for much of this month prior to yesterday’s Fed announcement? The old saying “baked-in” comes to mind.
As I always say, lenders will use any excuse to raise mortgage rates, but take their sweet old time lowering them. That means we could even see more improvement in coming days and weeks, despite the Fed’s rate increase yesterday.
Tip: The only direct mortgage impact you’ll see from a Fed announcement is an increase or decrease in the prime rate, which affects the pricing of HELOCs, among other consumer loans. Everything else is indirect and not necessarily correlated.