Fed Funds Rate vs Mortgage Rates

As we all know, the Federal Reserve did hike the Fed Funds Rate yesterday by ¼%.  This is creating a great deal of panic with people wondering if this means mortgage rates will now be .25% higher. The good news is that the Federal Reserve is not in control of setting mortgage interest rates.  The Fed Funds Rate is basically a rate that banks charge to other banks for overnight lending.  The idea is that if banks are now paying more money for the cash they are borrowing, they will pass those costs on to the consumer in the form of higher interest rates.  This will directly impact loans that are tied to the Prime Lending rate, such as car loans, home equity loans and credit card loans.  However, since mortgage rates are set by the market, they will not be directly impacted per say.


It is important to note that if you pull up a long term graph of mortgage rates and compare that to a graph of the Feds Funds Rate over the same period of time, you will see a correlation between the two.  Generally speaking, times of high mortgage rates also are times of a high Feds Funds Rate.  There are many reasons this occurs.  The Feds Funds Rate will move higher to fight off inflation as consumer prices are moving higher.  A market with strong inflation will also push mortgage interest rates higher to ensure that people investing into mortgage bonds receive the same net return (after inflation).  In a case where the Fed raises the Fed Funds Rate at a time of low and even reducing inflation, the Fed move can actually create downward pressure to mortgage interest rates.  That could be the longer term result of the Fed making a move at this time.  With inflation still falling, this move could turn out to be good for the bond market, which could lead to lower mortgage interest rates.  However, it’s too early to say for sure at this point.


Mortgage bonds were able to hang on yesterday without breaking beneath support.  As long as bonds remain above support, there is no reason to rush in and lock.  However, the fear is that bonds will lose steam as the day moves on.  We will have to see if they are able to muster the strength to continue a run higher or if they will eventually retreat.  If bonds begin to fall, the safe play will be to lock.  In the meantime, watch the markets closely and hope for a run higher.

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