Tomorrow, the Fed is expected to raise the target federal funds rate by 0.25%, the first such increase since December 2018.
The move has been telegraphed for months, if not longer, so it will come as no surprise to just about anyone.
It will push the key short-term borrowing rate from a range of 0%-.25% to .25%-.50%, which is still rock bottom.
However, the Fed may increase this key rate another six times in 2022, a plan intended to cool inflation and avoid an overheated economy.
How that may impact mortgage rates, if at all, remains to be seen. They could actually go down.
Watch Out for All the “Fed Raises Mortgage Rates” Articles Tomorrow
File this one under “no correlation,” despite a flood of news articles claiming the Fed’s rate cut directly impacts mortgage rates.
As noted, the Fed will raise the federal funds rate by a quarter percentage point to a range of 0.25-0.5% tomorrow due to inflation concerns, despite ongoing uncertainty in Ukraine.
This will likely lead to lots of news articles about the “Fed raising mortgage rates,” even though the Fed doesn’t price mortgages. Period.
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 excitement-inducing or 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 ones being “rates expected to rise” or “rates could move even lower thanks to Fed rate cut.”
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 tend to do more harm than good.
The Fed Doesn’t Announce Mortgage Rates
- The Fed doesn’t set or announce consumer mortgage rates
- Regardless of the bountiful misinformation you’ll find out there
- When they announce a Fed rate change, mortgage rates may go up or down (or do nothing!)
- Ultimately mortgage rates are affected by countless factors beyond a singular Fed announcement
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 Jerome Powell and his posse don’t sit down and decide which way mortgage rates will go.
They don’t say, “Hey, the 30-year fixed should be 5%, not 4%. Let’s increase rates!”
Rather, they discuss the state of the broader economy, inflation, monetary policy, and so on.
They almost never mention mortgages explicitly, except for in recent years thanks to the remnants of the quantitative easing program known as QE3.
That is expected to turn into QT, or quantitative tightening, where the asset they hold are finally unloaded.
The pace of that move could make a big impact on mortgage rates, indirectly, as they hold a ton of mortgage-backed securities (MBS).
But because mortgage rates have already risen so much this year, and blown past 2022 mortgage rate predictions, it could be priced in.
In fact, mortgage rates could get a breather, despite an interest rate hike!
No Correlation Between Fed Funds Rate and Mortgage Rates
Ultimately, there’s no clear correlation between the Federal Funds Rate and mortgage rates.
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 below, 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
- A more accurate way of defining the Fed/mortgage rate relationship
- Is that it might be an indirect, long-term one that takes a lot of time to materialize
- If the Fed is raising rates over time, long-term mortgage rates may eventually follow
- The same is true if the Fed is guiding rates lower, as common economic factors typically affect both
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 cues.
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.
Tomorrow likely won’t be any different, though as always, there are some unanswered questions, which may or may not be addressed.
Anyway, 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 their rate sheets from morning to afternoon.
But that reprice can completely counter the Fed’s move. For example, the Fed can lower its key rate while mortgage lenders reprice rates higher. Or do absolutely nothing.
Mortgage Rates Can Go Either Way…
- Pay attention to Fed announcements when they’re released
- But don’t give them too much weight or worry about them
- Or better yet, think you can predict what will happen to mortgage rates
- Remember, there’s no clear short-term correlation, even if they do make an immediate impact
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 raised rates 0.25% so my 30-year mortgage will be that much higher too. And you can’t say oh no, the Fed raised rates, I should have locked my mortgage!
The mortgage rate trend lately has without a doubt been higher, but we’ve reached a point where rates are at multi-year highs in a matter of months, making it difficult for them to get even worse.
It’s not to say they can’t worsen from here, but some clarity from the Fed could actually allow banks and mortgage lenders to ease up and start lowering rates. Or at least stop raising them!
In summary, it can be a mystery as to how things will go post Fed statement, 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 tomorrow. Or even next week.
The Fed might just be good at telling us which direction mortgage rates are headed (eventually) based on policy and broader economic conditions.
Just remember this; lenders will use any excuse to raise mortgage rates, but take their sweet old time lowering them.
We could even see improvement in coming days and weeks, but not because of the Fed. More so due to economic and geopolitical unknowns worldwide.
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.
Speaking of, the Fed may raise their key rate a total of seven times this year, which would increase HELOC rates by 1.75% total.
This could make a lower-rate cash out refinance a better way to tap equity, depending on your existing first mortgage rate.