Yesterday, the Federal Reserve raised its benchmark federal funds rate a quarter point (.25%).
As a result, some may have expected consumer mortgage rates to also rise by .25%.
So if the 30-year fixed were priced at 6.75%, it would climb to 7.00% due to the Fed’s action.
But the opposite occurred. The 30-year fixed actually fell by about a quarter-point, from 6.75% down to 6.50%.
What gives? How can the two move in opposite directions?
Mortgage Rates Can Go Down Even If the Fed Raises Rates
As noted, the Federal Reserve raised its federal funds rate. That’s an interest rate they directly control.
And it’s what banks charge one another for overnight use of excess reserves. It’s not a consumer interest rate, nor is it a mortgage rate.
However, it does play a role in consumer lending, as there’s often a trickle-down effect. Basically, banks and lenders take cues from the Federal Reserve.
But the rate change in the Fed announcement might totally counteract the movement of consumer rates such as those on home loans.
Why? Because the Fed isn’t just raising or lowering rates when it releases its Federal Open Market Committee (FOMC) statement.
It’s also providing context for why its raising or lowering its fed funds rates. And from that context we get movement in mortgage rates.
What Happened Yesterday? The Fed Raised Rates and Mortgage Rates Fell
In the March 22nd, 2023 FOMC statement, the Federal Reserve increased the target fed funds rate to a range of 4-3/4 to 5 percent.
This was mostly expected, though it was possible they could have stood pat too and done nothing.
But the general thinking was they wanted to calm the markets by not outright stopping their rate increases, while also not causing distress with a bigger hike, such as 0.50%.
However, there was more to the story. In the FOMC statement, they also spoke of current conditions and future outlook.
And their statement changed from the February 1st, 2023 release. Here’s the bulk of what changed:
They previously wrote, “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
This was interpreted as numerous rate hikes were needed to tame inflation, which would mean consumer interest rate would likely rise as well.
After all, if the outlook was persistent inflation, more hikes would be necessary to bring it down to its 2% target.
In the release yesterday, they said, “The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
So we went from “ongoing increases” will be appropriate to “some additional policy firming” may be appropriate.
That sure sounds like a softer, dovish approach. And one could argue they’re pretty much nearing their terminal rate, which is the max they expect the fed funds rate to climb.
The Fed Might Be Mostly Done Hiking Rates
Simply put, the Fed essentially said it’s mostly done with rate hikes. This could mean another 0.25% increase, but that’s it.
As a result, long-term mortgage rates let out a sigh of relief.
Why? Because the expectation is rates have more or less peaked, and could even begin falling as soon as later this year.
And while the Fed doesn’t control mortgage rates, its policy decisions do play a role in the direction of rates.
So if they’re telling us the job is mostly complete, we can look forward to a more accommodative rate policy.
On top of that, the recent banking crisis could result in tighter lending conditions. This too has a deflationary effect, as less money is circulated through the economy.
Long story short, this takes pressure off the Fed to increase its own rate.
Just Beware of Tighter Lending Conditions
The one caveat here is if the banking sector comes under more pressure, consumers could lose access to credit.
If banks and mortgage lenders are less willing to lend, it could be more difficult to get a home loan.
And they might be conservative in their pricing. This means the spread between the 10-year Treasury yield and 30-year mortgage rates could further widen.
So even if the 10-year yield drops a ton, mortgage rates might linger at higher levels than they ought to.
Additionally, those with lower FICO scores and/or higher DTI ratios could have more trouble getting a cheap mortgage. Or any mortgage at all.
In the meantime, you might be able to lock in a slightly lower mortgage rate than a week ago. Just be mindful of day-to-day volatility, similar to the stock market.
But if the trend continues, we could see meaningful interest rate movement later in 2023 and perhaps into 2024.
Whether that’s a return to mortgage rates in the 4% range remains to be seen.